[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                        ALTERNATIVE MINIMUM TAX 

=======================================================================

                                HEARING

                               before the

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                 of the

                      COMMITTEE ON WAYS AND MEANS

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 7, 2007

                               __________

                           Serial No. 110-19

                               __________

         Printed for the use of the Committee on Ways and Means

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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM McCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM McDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. McNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey        JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                  Brett Loper, Minority Staff Director

                                 ______

                Subcommittee on Select Revenue Measures

                RICHARD E. NEAL, Massachusetts, Chairman

LLOYD DOGGETT, Texas                 PHIL ENGLISH, Pennsylvania
MIKE THOMPSON, California            THOMAS M. REYNOLDS, New York
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
ALLYSON Y. SCHWARTZ, Pennsylvania    JOHN LINDER, Georgia
JIM McDERMOTT, Washington            PAUL RYAN, Wisconsin
RAHM EMANUEL, Illinois
EARL BLUMENAUER, Oregon

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of February 28, 2007, announcing the hearing............     2

                               WITNESSES

Eric Solomon, Assistant Secretary for Tax Policy, U.S. Department 
  of the Treasury................................................     6
Nina E. Olson, National Taxpayer Advocate, Internal Revenue 
  Service........................................................    12
Leonard E. Burman, Ph.D, Director, Tax Policy Center, a joint 
  venture of the Urban Institute and Brookings Institution.......    21
Alan Viard, Ph.D, Resident Scholar, American Enterprise Institute    36

                       SUBMISSIONS FOR THE RECORD

Norquist, Grover, statement......................................    65
Rivero, Carmelo & Betty, statement...............................    68


                   HEARING ON ALTERNATIVE MINIMUM TAX

                              ----------                              


                        WEDNESDAY, MARCH 7, 2007

             U.S. House of Representatives,
                       Committee on Ways and Means,
                   Subcommittee on Select Revenue Measures,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:00 p.m., in 
room 1100, Longworth House Office Building, Hon. Richard E. 
Neal (Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                                CONTACT: (202) 225-5522
FOR IMMEDIATE RELEASE
February 28, 2007
SRM-1

         Neal Announces Hearing on the Alternative Minimum Tax

    House Ways and Means Select Revenue Measures Subcommittee Chairman 
Richard Neal (D-MA) announced today that the Subcommittee on Select 
Revenue Measures will hold a hearing on the Alternative Minimum Tax 
(AMT). The hearing will take place on Wednesday, March 7, 2007, in the 
main Committee hearing room, 1100 Longworth House Office Building, 
beginning at 2:00 p.m.
      
    The Subcommittee will examine the growing scope of the AMT and its 
interaction with individual-based tax provisions, including the tax 
cuts enacted since 2001. In view of the limited time available to hear 
witnesses, oral testimony at this hearing will be from invited 
witnesses only. However, any individual or organization not scheduled 
for an oral appearance may submit a written statement for consideration 
by the Committee and for inclusion in the printed record of the 
hearing.
      

BACKGROUND:

      
    The Alternative Minimum Tax (AMT) is a parallel income tax 
originally designed to ensure that taxpayers with substantial economic 
income pay at least some minimum level of tax. However, the AMT was 
never intended to reach middle-income taxpayers nor to become the tax 
system applicable to most taxpayers.
    To calculate the AMT, taxpayers first determine tax liability under 
the regular income tax, and then add back certain ``preference'' items 
to taxable income. After deducting an exemption amount under AMT, 
taxpayers pay whichever is higher under the regular income tax or AMT. 
Personal exemptions, the itemized deduction for state and local taxes, 
and miscellaneous itemized deductions together account for 90% of the 
preference items added back under the AMT, with state and local taxes 
almost half of that amount.
    There are two main reasons for the increase in the number of 
taxpayers affected by the AMT. First, the tax cuts under the regular 
income tax that were enacted as part of the Economic Growth and Tax 
Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief 
Reconciliation Act of 2003, and the Working Families Tax Relief Act of 
2004 have narrowed significantly the differences between regular and 
AMT tax liabilities for middle and higher income individuals. Second, 
regular income tax brackets are indexed for inflation but the AMT 
thresholds are not. This has, over time, reduced further the 
differences between regular income tax liabilities and AMT liabilities 
at lower income levels.
    The combination of the two factors stated above means that, absent 
Congressional action on this issue, the number of taxpayers that will 
be affected by the AMT will grow significantly. The number of taxpayers 
subject to the AMT is expected to jump from 4.2 million in 2006 to 23 
million in 2007. Taxpayers filing joint returns with no dependents 
could be subject to the AMT at income levels as low as 75,395 in 2007, 
assuming that temporary protections for personal non-refundable credits 
and the higher exemption levels are not extended. By 2016, if the 
recently enacted tax cuts are extended, tax experts estimate that the 
number of taxpayers paying the AMT will increase to more than 48 
million. High income states such as New Jersey, New York, Connecticut, 
the District of Columbia, and California have the highest percentage of 
taxpayers subject to the AMT.
    In announcing the hearing, Chairman Neal said, ``The AMT was 
originally enacted to ensure that a small group of high-income 
individuals who managed to avoid paying any income tax would pay at 
least a minimum amount of tax. The role of the AMT today has changed 
significantly. The AMT has become a stealth tax on far too many working 
families. We are committed to fully understanding the scope of this 
problem so that we can find a solution and prevent millions of working 
families from a massive and unexpected tax increase.''

FOCUS OF THE HEARING:

    This hearing will explore the history of the AMT and how it has 
grown to affect many more taxpayers than at its inception.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
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    Chairman NEAL. I call this meeting of the Subcommittee on 
Select Revenue Measures to order, and would have everybody 
please take their seats.
    This is the first hearing of the Select Revenue Measures 
Subcommittee, and I think it's appropriate that the subject we 
will discuss today is the alternative minimum tax (AMT), or as 
some refer to it, the ATM machine for our Federal Government.
    The AMT is an issue that I have been battling for almost a 
decade. That's right, almost ten years. I first filed 
legislation trying to protect middle income families from the 
reach of the AMT back in 1998. I would note that the ranking 
Republican on this Subcommittee, my friend Mr. English, has 
also filed legislation to repeal AMT, reaching back to 1999.
    As Ambrose Bierce once wrote, ``A patience is a minor form 
of despair, disguised as virtue.'' I think, as it relates to 
AMT, Mr. English and I have both proved our virtue.
    The AMT is a bipartisan problem, and we are seeking 
bipartisan solutions. It is a parallel and stealth tax system, 
estimated to hit 23 million taxpayers this year, if we do not 
extend a $50 billion patch to the system. Can you imagine a $50 
billion patch?
    For those of you who appreciate classic, or older cars, 
like I do, you know how expensive it is to keep them up and 
running each year. At some point, though, you wonder if it's 
worth the effort. Many car owners simply resort to cheaper 
fixes--from a different day and age, it was called Bondo--to 
patch up the car, but it's never pretty, and eventually you 
have to commit to major overhaul. We are at that point with the 
AMT.
    The coat of Bondo that we put on year after year is just 
delaying the inevitable conclusion that this is a system that 
doesn't run very well. The testimony we will hear today on that 
point is quite dramatic. This year, a family of four earning 
just $66,000 could be hit by AMT. By the end of the decade, 
virtually all families earning between $75,000 and $100,000 a 
year with 2 children will be paying higher taxes, due to the 
AMT.
    At my direction, the Committee staff prepared for each 
Member today specific estimates showing the growth of AMT, by 
Congressional district, for 2007. It's important to see how 
this will be impacting our constituents. State and local taxes 
and personal exemptions--that is, children--are the top reasons 
taxpayers get pushed into a family--unfriendly AMT.
    This system, originally designed to catch millionaires who 
were avoiding taxes with excessive deductions, has gone 
seriously awry. It is my intention to offer a permanent 
solution to AMT, and not just another coat of Bondo.
    This series of hearings will assist the Subcommittee in 
finding and potentially recommending that solution. Today's 
hearings will explore the history, the background, and policy 
reasons for AMT. At our next hearing, two weeks from now, we 
will hear more of a firsthand experience from those impacted by 
AMT.
    I am pleased to welcome our witnesses today. From the 
Treasury Department, we have Mr. Eric Solomon, the assistant 
secretary for tax policy, who will explain the position of the 
Administration, surely a partner in any ultimate solution.
    We are very fortunate, also, to have Ms. Nina Olson, the 
National Taxpayer Advocate, who is exactly what her title says: 
our advocate. She has recommended for years that AMT be 
repealed, because of the burden it places on individual 
taxpayers.
    We are also pleased to welcome today Dr. Len Burman, the 
director of the Tax Policy Center. If you read pretty much any 
article or paper on the AMT, you will see Len Burman quoted, or 
his work cited, in the footnote. We are fortunate to have his 
expertise today, as well.
    I also want to welcome Dr. Alan Viard, resident scholar at 
the American Enterprise Institute (AEI). Dr. Viard has written 
on the problems in the AMT, both at AEI and at his former 
position as an economist with the Federal Reserve Bank in 
Dallas.
    St. Augustine said that, ``Patience is the companion of 
wisdom,'' and I know Mr. English, from previous get-togethers, 
we are both acolytes of St. Augustine. Today we await your 
wisdom, and we certainly expect to find common ground for a 
solution. At this time I would like to recognize my friend, Mr. 
English, for an opening statement.
    Mr. ENGLISH. I want to thank you, Mr. Chairman, and I 
particularly want to thank you for calling today's hearing on 
the AMT, and assembling this panel, which I think offers a 
diversity of informed viewpoint on how to address this problem.
    This initial examination is enormously timely, and 
hopefully will yield a dialog that can point us in the 
direction for a possible solution in this Congress, or in the 
near future, to deal with this growing monster of an AMT.
    The most recent attempts with the AMT have been through the 
use of patches. Yes, that's been a temporary expedient, which 
has yielded bigger and bigger problems each time. The AMT still 
remains a source of complexity for American taxpayers, and in 
my view, a drag on economic growth. I believe a comprehensive 
solution is the most desirable outcome.
    The AMT is a classic example of the rule of unintended 
consequences. Created in the 1960s, it was created by a 
majority that insisted it would only affect the rich. The tax 
was dramatically broadened again in the 1980s and 1990s. Tax 
increases, masquerading as reform, is what gives this 
legislative process a bad name. I hope that we can avoid 
similar mistakes in the weeks and the months to come.
    In my view, the policy challenge facing this Subcommittee 
and this Congress is the desperate need to reform the entire 
tax code. One of the strongest arguments for doing that is the 
continued existence of the AMT.
    I understand we may hear an argument being made today that 
the AMT is falling on more families because of the tax cuts 
enacted in 2001 and 2003. This logic would maintain that if 
income taxes are increased, less people would be subjected to 
the AMT. That's not my approach to reform. I would argue that 
this line of thinking abandons the facts. The AMT is growing so 
significantly because the tax brackets were never indexed for 
inflation. No American is worse off under recent tax relief, 
and fewer taxpayers are subject to the AMT than otherwise would 
have been the case.
    After--and I approached this hearing today with an open 
mind--after today, I think we may be able to conclude that the 
real solution is tax reform and, above all, abolishing the AMT. 
I am sorry to see that we missed an opportunity to do that in 
1999, as a result of a Presidential veto, but it is my hope 
that this Subcommittee will play a central role in developing a 
creative policy response that will point us in the right 
direction.
    Again, I am grateful to you, Mr. Chairman, for initiating 
this process. Thank you.
    Chairman NEAL. Thanks, Phil. Without objection, any other 
Members wishing to insert statements as part of the record may 
do so. All written statements written by the witnesses will be 
inserted into the record as well.
    Mr. Solomon. Thank you.

STATEMENT OF ERIC SOLOMON, ASSISTANT SECRETARY FOR TAX POLICY, 
                U.S. DEPARTMENT OF THE TREASURY

    Mr. SOLOMON. Mr. Chairman, Ranking Member English, and 
distinguished Members of the Committee, thank you for the 
opportunity to discuss the issue of the individual AMT.
    The AMT was intended to deal with a relatively small but 
important issue. Unfortunately, the AMT illustrates how a good 
faith attempt to address an issue in the income tax system can 
have enormous, undesirable consequences. Today, the AMT is 
imposing burdens on millions of taxpayers who are not its 
intended targets. It is complex, and it frustrates millions of 
taxpayers who have to calculate their taxes twice, once under 
the regular tax system, and a second time under the AMT tax 
system.
    The predecessor of the AMT, the minimum tax, was first 
enacted in 1969 to ensure that a small group of high-income 
individuals who had managed to avoid paying Federal income tax 
would pay at least a minimum amount of tax. More than 37 years 
of changes to the tax code have transformed the original 
minimum tax into the current AMT.
    The AMT is a second income tax that operates parallel to 
the regular income tax. The AMT has its own tax base, exemption 
amounts, tax rates, and usable tax credits. The AMT tax base 
starts from taxable income, as defined under the regular income 
tax, but the base is broadened by adding back certain tax 
preferences, such as itemized deductions for State and local 
taxes, the standard deduction, and personal exemptions. The AMT 
tax base is reduced by an AMT exemption, which varies by filing 
status but not by family size. The AMT exemption is phased out 
above certain income levels. Beginning with the Economic Growth 
and Tax Relief Reconciliation Act of 2001 (P.L. 107-16), 
Congress has included provisions in its tax relief bills to 
extend and increase the AMT exemption temporarily, thus 
preventing a large increase in the number of AMT taxpayers.
    For 2006, the AMT exemption was $62,550 for married 
taxpayers filing jointly, and $42,500 for unmarried taxpayers. 
Since 1993, the first $175,000 of taxable income for AMT 
purposes is taxed at a 26 percent rate, and amounts above 
$175,000 are taxed at a 28 percent rate. However, because the 
AMT exemption is phased out, some taxpayers face a marginal 
effective AMT tax rate of up to 35 percent.
    The temporary extensions of the higher AMT exemptions and 
allowance of the full use of most personal tax credits--which 
have come to be known as the AMT patch--expired at the end of 
2006. The President's Fiscal Year 2008 budget includes a 
proposal to extend the AMT patch through 2007, with the AMT 
exemptions increased for 2007 to hold the number of taxpayers 
affected by the AMT at approximately four million.
    The AMT exemption in effect through 2006 has kept the vast 
majority of taxpayers from being subject to the AMT. However, 
if the AMT patch is not extended, or the AMT is not otherwise 
addressed, the number of taxpayers projected to be affected by 
the AMT will rise sharply from 4 million in 2006 to 25 million 
in 2007. The AMT will increasingly affect middle-income 
taxpayers unless action is taken.
    The AMT also increasingly affects families with children, 
because it does not allow deductions for personal exemptions. 
Moreover, the AMT exemption includes a significant marriage 
penalty, which can worsen the effect of AMT on married couples.
    Unlike the regular tax, the AMT tax system is not indexed 
for inflation. The AMT exemption, the exemption phase-out, and 
the boundary between the two AMT tax rates are all fixed in 
nominal terms. Since these AMT parameters are not indexed, 
whereas the main parameters of the regular income tax are 
indexed annually for the effects of inflation, over time the 
AMT itself has become a significant issue.
    If the AMT exemption had been indexed to inflation 
beginning in 1984, when the regular income tax brackets were 
indexed, the exemption in 2007 would be almost $81,000 for 
married taxpayers filing jointly, and $61,000 for unmarried 
individuals. With these indexed exemption amounts, only about 
two million taxpayers would be affected by the AMT in 2007.
    We share the concerns of taxpayers and Congress about the 
increasing scope of the AMT. We believe that a permanent 
solution is essential for the continued functioning of our 
individual income tax system. We look forward to working with 
this Committee and others in the Congress on a permanent 
solution to this difficult and important issue. However, until 
a long-term solution has been enacted, it is essential that we 
prevent an ever-larger share of taxpayers from being affected 
by the AMT. We are committed to helping ensure that middle-
income taxpayers are not affected by the AMT this year or in 
the future.
    Thank you, again, Mr. Chairman, Ranking Member English, and 
Members of the Committee, for the opportunity to appear before 
you today. I would be pleased to answer any questions that you 
might have.
    [The prepared statement of Mr. Solomon follows:]
  Statement of Eric Solomon, Assistant Secretary for Tax Policy, U.S. 
                       Department of the Treasury
    WASHINGTON, D.C.--Mr. Chairman, Ranking Member English, and 
distinguished Members of the Committee, thank you for the opportunity 
to discuss the issue of the individual alternative minimum tax.
    The individual alternative minimum tax, or AMT, was intended to 
deal with a relatively small but important issue. Unfortunately, the 
AMT has created a far larger issue than the one it was intended to 
address.
    The Administration is very concerned about the adverse effects of 
the AMT. It is complex and frustrates the millions of taxpayers who 
have to calculate their taxes twice--once under the regular tax system 
and a second time under the AMT tax system. Taxpayers find that 
benefits otherwise provided under the regular tax system are taken away 
by the AMT, or they do the double calculations only to find that they 
are not subject to the AMT.
History of the AMT
    The predecessor of the AMT--the minimum tax--was first enacted in 
1969 to ensure that a small group of high-income individuals who had 
managed to avoid paying federal income tax would pay at least a minimum 
amount of tax. In 1969, Treasury Secretary Barr noted in his testimony 
before the Joint Economic Committee of Congress that 155 taxpayers with 
incomes over $200,000 paid no tax in 1966. Even though the minimum tax 
reduced the number of high-income taxpayers who otherwise would have 
paid no income tax, it has never been completely successful in 
attaining the original goal of ensuring that all high-income taxpayers 
pay at least some tax. More than 37 years of legislative changes to the 
tax code have transformed the original minimum tax into the current 
AMT.
Structure of the AMT
    The AMT is a second income tax that operates parallel to the 
regular income tax. The AMT has its own tax base, exemption amounts, 
tax rates, and usable tax credits. A taxpayer's AMT liability is 
essentially the excess of the liability calculated under the AMT tax 
system over the liability calculated under the regular income tax.
    The AMT tax base starts from taxable income as defined under the 
regular income tax, but the base is broadened by adding back certain 
tax preferences. Preferences include, for example:

      the itemized deduction for State and local taxes,
      the itemized deduction for certain miscellaneous expenses 
exceeding two percent of adjusted gross income (AGI),
      the itemized deduction for medical expenses to the extent 
it represents medical expenses of less than 10 percent of AGI,
      the standard deduction, and
      personal exemptions.

    A number of other items are treated as AMT preferences totally, or 
to the extent they are AMT preferences, must be calculated differently 
for AMT purposes. These include items such as incentive stock options, 
the net operating loss deduction, and investment interest expenses. The 
largest AMT preference items are the regular tax State and local tax 
deduction and personal exemptions.
    The AMT tax base is reduced by an AMT exemption which varies by 
filing status but not by family size. From 1984 through 1992, the AMT 
exemption was $40,000 for married taxpayers and $30,000 for unmarried 
taxpayers. In 1993, it was increased to $45,000 for married taxpayers 
and $33,750 for unmarried taxpayers. Beginning with the Economic Growth 
and Tax Relief Reconciliation Act of 2001 (EGTRRA), Congress has 
included provisions in each of the major tax relief bills to increase 
the AMT exemption temporarily, thus preventing a large increase in the 
number of AMT taxpayers. For 2006, the AMT exemption levels were 
$62,550 for married taxpayers filing joint returns and $42,500 for 
unmarried individuals.
    The AMT exemption begins to be phased out at $150,000 of AMT income 
for married taxpayers filing joint returns, at $112,500 for unmarried 
individuals, and at $75,000 for married filing separately returns. The 
exemption is reduced by 25 percent of AMT income above those thresholds 
until they are completely phased out.
    Since 1993, the first $175,000 of taxable income for AMT purposes 
is taxed at a 26 percent rate, and amounts above $175,000 are taxed at 
a 28 percent rate. However, capital gains and qualified dividends are 
taxed under the AMT at the lower tax rates that apply under the regular 
income tax. Because the AMT exemption is phased out, it results in four 
effective AMT marginal tax rates of 26 percent, 32.5 percent (for 
taxpayers phased out of the 26-percent AMT tax bracket), 28 percent, 
and 35 percent (for those phased out of the 28-percent AMT tax 
bracket). Consequently, because of the phase-out of the exemption, some 
taxpayers face a marginal effective AMT tax rate of 35 percent.
    Generally, the AMT can prevent some tax credits from being claimed 
against the regular tax because credits are disallowed if they reduce 
regular tax below the tentative amount of the AMT tax. Since 1998, 
Congress has repeatedly extended temporary legislation that has 
permitted most personal tax credits to reduce the otherwise applicable 
AMT. However, general business credits (most importantly the low-income 
housing credit) can be limited by the AMT.
    The temporary extensions of the higher AMT exemptions and allowance 
of the full use of most personal tax credits (which have come to be 
known as the ``AMT patch'') expired at the end of 2006. The President's 
fiscal year 2008 Budget includes a proposal to extend the AMT patch 
through 2007, with the AMT exemptions increased for 2007 to $65,350 for 
married taxpayers filing joint returns and $43,900 for unmarried 
individuals. The Budget proposal is designed to hold the number of 
taxpayers affected by the AMT constant at approximately 4 million.
Does AMT Eliminate Nontaxable High Income Returns?
    In spite of the AMT, each year a very small percentage of high-
income tax returns are filed reporting no income tax liability. The 
reasons for high-income returns reporting no income tax liability are 
varied. Certain itemized deductions and exclusions from income could 
cause this result. High-income returns with no income tax liability 
often result from a combination of factors, none of which, by itself, 
would completely eliminate income tax liability. Some items that singly 
or in combination may eliminate regular income tax liability cannot 
eliminate AMT liability because these items give rise to adjustments or 
preferences for AMT purposes. However, due to the AMT exemption and the 
fact that the starting point for alternative minimum taxable income is 
taxable income for regular tax purposes, which could be negative, a 
return could report no regular income tax and no AMT even though it 
included some items that produced AMT adjustments or preferences.
    Tax-exempt bond interest, itemized deductions for interest expense, 
miscellaneous itemized deductions not subject to the two-percent-of-AGI 
floor, casualty or theft losses, and medical expenses (exceeding 10 
percent of AGI) could, by themselves, completely eliminate income tax 
liability because they do not generate AMT adjustments or preferences. 
More typically, combinations of these items together with deductions 
for charitable contributions completely eliminate tax liability without 
generating AMT liability.
Complexity of the AMT
    The complexity and burden of the AMT result from the necessity that 
taxpayers understand and comply with two parallel tax systems. 
Moreover, because many taxpayers become subject to the AMT for reasons 
that are not the result of tax-motivated planning, many taxpayers are 
not aware that they will be affected by the AMT until they complete 
their tax returns. Even then, some taxpayers who complete their returns 
manually may not be aware that they are required to do the calculations 
for the AMT, creating a compliance problem.
The Growing Ranks of AMT Payers
    Unlike the regular tax, the AMT tax system is not indexed for 
inflation. The AMT exemption, the exemption phase-out, and the boundary 
between the two AMT tax rates are all fixed in nominal terms. 
Consequently, with the passage of time, the effects of inflation will 
steadily increase the number of taxpayers subject to AMT and the amount 
of revenue from the AMT. When relatively few taxpayers were affected, 
the AMT arguably was achieving its policy objective. However, serious 
tax policy issues arise when the AMT affects millions of taxpayers who 
were never intended to be the target of this separate tax.
    The AMT exemption in effect through 2006 has generally kept the 
vast majority of taxpayers from being subject to the AMT. If the AMT 
exemption had been indexed to inflation beginning in 1984 when the 
regular income tax brackets were indexed, the exemption in 2007 would 
be about $81,000 for married taxpayers filing jointly and $61,000 for 
unmarried individuals. With these indexed exemption amounts, only about 
2 million taxpayers would be affected by the AMT in 2007.
Growth of the AMT
    If the AMT patch is not extended or the AMT is not otherwise 
addressed, the number of taxpayers projected to be affected by the AMT 
will rise sharply, from 4 million in 2006 to 25 million in 2007 (Chart 
1). If no further changes are made to the AMT, the number of taxpayers 
affected by the AMT is expected to grow to over 56 million by 2017. By 
2017, almost one-half of all taxpayers with income tax are projected to 
be affected by the AMT.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The AMT will increasingly affect middle-income taxpayers unless 
action is taken. If the Administration's proposed extension and 
expansion of the AMT patch is enacted for 2007, about 7 percent of 
taxpayers with incomes between $100,000 and $200,000 will be subject to 
the AMT for 2007. However, if the AMT patch is not extended beyond its 
current expiration in 2006, when taxpayers file their tax returns in 
the spring of 2008 for tax year 2007, over 80 percent of taxpayers with 
income between $100,000 and $200,000 will be subject to the AMT.
    To put this into perspective, consider how the AMT would affect a 
hypothetical joint filer with two children in tax year 2007 if the 
Congress does not extend the AMT patch as proposed in the 
Administration's 2008 Budget (see Chart 2). The taxpayer calculates tax 
liability under both the regular tax and the AMT and pays whichever is 
larger. The illustration shows that in 2007 the hypothetical taxpayer 
becomes subject to the AMT when his income exceeds $66,114. The AMT is 
no longer a tax that applies only or predominantly to high-income 
taxpayers.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    The AMT also increasingly affects families with children because it 
does not allow deductions for personal exemptions. Moreover, the AMT 
exemption includes a marriage penalty, which can worsen the effect of 
the AMT on married couples.
    Assuming no AMT patch extension for 2007 or other action with 
respect to AMT, the increase in the number of AMT taxpayers over the 
next decade will be accompanied by a dramatic increase in tax revenues 
from the AMT. AMT revenue will increase from $22 billion in fiscal year 
2006 to $67 billion in fiscal year 2007 and to $250 billion in 2017 
(roughly 12 percent of total individual income tax revenue).\1\ AMT 
revenue will become so large that by 2013 the cost of repealing the AMT 
would exceed the cost of repealing the regular tax (Chart 3).
---------------------------------------------------------------------------
    \1\ This estimate uses a baseline that includes the President's 
fiscal year 2008 Budget proposal to extend permanently the 2001 and 
2003 tax relief.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Addressing the AMT Issue
    In many respects, the AMT illustrates how a good-faith attempt to 
address an issue in the income tax system can have enormous unintended 
and undesirable consequences. Today the AMT is imposing burdens on 
millions of taxpayers who were not its intended targets. Because the 
AMT parameters are not indexed, whereas the main parameters of the 
regular income tax are indexed annually for the effects of inflation, 
over time the AMT itself has become a significant issue.
    The Administration shares the concerns of taxpayers and Congress 
about the increasing scope of the AMT. A permanent solution is 
essential for the continued functioning of our individual income tax 
system.
    We look forward to working with this Committee and others in the 
Congress on a permanent solution to this difficult and important issue. 
However, until a long-term solution has been enacted, it is essential 
to prevent an ever-larger share of taxpayers from being affected by the 
AMT. We are committed to helping ensure that middle-income taxpayers 
are not affected by the AMT this year or in the future. In the past, 
generally the AMT has been dealt with on a year-by-year basis, and the 
Administration's proposal in the President's fiscal year 2008 Budget 
for a one-year AMT patch reflects that experience.
    Thank you again, Mr. Chairman, Ranking Member English, and Members 
of the Committee for the opportunity to appear before you today. I 
would be pleased to answer any questions you might have.

                                 

    Chairman NEAL. Thank you, Mr. Solomon. Now, Ms. Olson.

    STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE, 
                    INTERNAL REVENUE SERVICE

    Ms. OLSON. Mr. Chairman, Ranking Member English, and 
distinguished Members of the Subcommittee, thank you for 
inviting me to testify today about the AMT for individual 
taxpayers. Since I became the national taxpayer advocate six 
years ago, I have repeatedly called attention to the 
deficiencies in the AMT. In my 2006 annual report to Congress, 
I designated the AMT as the most serious problem facing 
taxpayers today.
    Indeed, if I were given the opportunity to make just one 
change to the Internal Revenue Code, I would use it to 
eliminate the individual AMT. With the concept of a--when the 
concept of a minimum tax first came into the Code in 1969, the 
intent was to prevent wealthy taxpayers from using tax 
preferences to avoid paying their fair share of taxes.
    Congress has changed the tax laws many times since the 
inception of the AMT, and it has long since shut down many of 
the tax avoidance opportunities that existed in the 1960s and 
1970s. Today, the AMT affects millions of taxpayers with no tax 
avoidance motives at all, unless one considers choosing to live 
in a high-tax State, or choosing to have children to be a tax 
avoidance motive.
    For 2004, the Treasury Department found that fully 68 
percent of aggregate AMT tax preference dollars are 
attributable to the disallowance of the State and local tax 
deduction, and 19 percent of these dollars are attributable to 
disallowance of personal exemptions. Thus, about 87 percent of 
the additional income subject to tax under the AMT results 
simply because of taxpayers' place of residence, or family 
composition.
    Moreover, the AMT is now affecting increasing numbers of 
middle-income taxpayers, because the amount of income exempt 
from the AMT is not indexed for inflation. When Congress first 
enacted a minimum tax in 1969, the exemption amount was $30,000 
for all taxpayers. If Congress had indexed that amount, it 
would be equal to $165,000 today. Instead, the exemption 
amount, after temporary increases that expired in December, 
stands at $45,000 for married taxpayers, and $33,750 for most 
other taxpayers.
    At the same time, many of the so-called tax preferences 
claimed by middle-income taxpayers are indexed for inflation, 
and they are added back into the income under the AMT. As a 
result of these diverging trends, more income becomes subject 
to the AMT each year. In 2007, absent a change in law, it is 
projected that about 23.4 million individual taxpayers, or 26 
percent of individual filers who pay income tax, will be 
subject to the AMT.
    Among the categories of taxpayers hardest hit, 89 percent 
of married couples with adjusted gross incomes between $75,000 
and $100,000, and 2 or more children, will owe AMT. The burden 
that the AMT imposes is substantial. In dollar terms, it is 
estimated that each AMT taxpayer will owe, on average, an 
additional $6,782 in tax for 2006.
    Sometime very soon--by Mr. Burman's estimate, as early as 
this year--we will reach a point where it will cost more for 
Congress to repeal the AMT, than to repeal the regular tax and 
leave the AMT intact. That's astonishing. In a very real sense, 
then, the AMT has ceased to fulfill its intended mission of 
preventing tax avoidance by the wealthy, and is, instead, 
becoming the de facto tax system for millions of Americans.
    The obvious challenge in repealing the AMT is that its 
increasing revenue stream has been built into revenue 
estimates. So, if it is repealed, Congress will have to raise 
tax revenue in other ways, reduce spending, or allow the budget 
deficit to balloon. These alternatives, admittedly, are not 
appealing, but I have no doubt there are solutions that are far 
preferable to the status quo. Significantly, the longer 
Congress waits to act, the more dependent the Government will 
become on AMT revenue, and the harder, therefore, it will 
become to repeal it.
    To be viewed as fair, a tax system must be transparent. 
While the concept of a minimum tax is not unreasonable, the 
AMT, as currently structured, has morphed into something that 
was never intended. It is hitting taxpayers it was never 
intended to hit. It is taking large numbers of taxpayers by 
surprise, and subjecting them to estimated tax penalties. It is 
imposing onerous compliance burdens. It is altering the 
distribution of the tax burden that exists under the regular 
tax system. It is changing the tax incentives built into the 
regular tax system, and it is neutralizing the effects of 
changes to tax rates imposed under the regular tax system.
    Taxpayers subject to this treatment may wonder whether 
their Government is dealing fairly with them. My opinion is 
they have a right to ask that question. I strongly urge 
Congress to act before the AMT explosion occurs. Thank you, and 
good luck.
    [The prepared statement of Ms. Olson follows:]
   Statement of Nina E. Olson, National Taxpayer Advocate, Internal 
                            Revenue Service
    Mr. Chairman, Ranking Member English, and distinguished Members of 
the Subcommittee:
    Thank you for inviting me to testify today about the Alternative 
Minimum Tax (AMT) for individuals taxpayers.\1\ In my 2006 Annual 
Report to Congress, I designated the AMT as the most serious problem 
facing taxpayers and recommended that it be repealed.\2\ Indeed, if I 
were given the opportunity to make just one change to the Internal 
Revenue Code, I would use it to eliminate the individual AMT.\3\
---------------------------------------------------------------------------
    \1\ The views expressed herein are solely those of the National 
Taxpayer Advocate. The National Taxpayer Advocate is appointed by the 
Secretary of the Treasury and reports to the Commissioner of Internal 
Revenue. The statute establishing the position directs the National 
Taxpayer Advocate to present an independent taxpayer perspective that 
does not necessarily reflect the position of the IRS, the Treasury 
Department, or the Office of Management and Budget. Accordingly, 
Congressional testimony requested from the National Taxpayer Advocate 
is not submitted to the IRS, the Treasury Department, or the Office of 
Management and Budget for prior approval. However, we have provided 
courtesy copies of this statement to both the IRS and the Treasury 
Department in advance of this hearing.
    \2\ I have highlighted problems with the AMT in prior reports as 
well. In my 2001 Annual Report to Congress, I recommended that the AMT 
be repealed or, at a minimum, substantially revamped to accomplish its 
original objective of preventing high-income taxpayers from escaping 
taxation through the use of tax-avoidance techniques. National Taxpayer 
Advocate 2001 Annual Report to Congress 166-177. In my 2003 Annual 
Report to Congress, I designated the AMT as the most serious problem 
facing taxpayers. National Taxpayer Advocate 2003 Annual Report to 
Congress 5-19. In my 2004 Annual Report to Congress, I reiterated my 
recommendation that the AMT be repealed. National Taxpayer Advocate 
2004 Annual Report to Congress 383-385.
    \3\ As a matter of fairness, the repeal of the AMT would require 
that Congress address the treatment of unused prior-year minimum tax 
credits, perhaps simply by retaining section 53 of the Code.
---------------------------------------------------------------------------
    Why? Because the AMT is frustrating for taxpayers and bad for the 
tax system. It is frustrating for taxpayers for many reasons, including 
the difficulty in determining whether one is subject to the AMT, the 
difficulty in computing the AMT, the inaccurate and off-putting 
implication that the AMT applies because the taxpayer has escaped his 
or her rightful tax obligations by engaging in tax-avoidance 
techniques, and the fact that otherwise compliant taxpayers are often 
subject to penalties for failure to pay enough estimated tax during the 
year when they didn't properly anticipate their AMT liabilities.
    The AMT is bad for the tax system because the disillusionment felt 
by taxpayers subject to the tax can erode their willingness to comply 
in the future. Moreover, the AMT negates the effect of tax rates and 
other tax provisions that apply under the regular tax rules and almost 
invisibly alters the distribution of the tax burden that exists under 
the regular tax system.
    In my testimony today, I will provide an overview of the AMT, 
describe its history, explain how it is computed, and detail its key 
deficiencies. I will also provide several examples to show how it 
operates.\4\
---------------------------------------------------------------------------
    \4\ The Taxpayer Advocate Service does not possess a revenue-
estimating function. When we have written about the AMT in the past, we 
have generally used data developed by the Treasury Department's Office 
of Tax Analysis, the Joint Committee on Taxation, or the Tax Policy 
Center, a joint venture of the Urban Institute and the Brookings 
Institution. Economists from each of these entities have told us that 
the modeling the others use is similar and generally produces similar 
results. Because the Tax Policy Center has published the most extensive 
data on the AMT, my testimony today generally cites to Tax Policy 
Center data.
---------------------------------------------------------------------------
Overview
    The AMT was originally designed to prevent wealthy taxpayers from 
using tax shelters to avoid paying their fair share of taxes. However, 
Congress has changed the tax laws many times since the inception of the 
AMT and shut down many of the tax-avoidance opportunities that existed 
in the 1960s and 1970s. Today, the AMT affects millions of taxpayers 
with no tax-avoidance motives at all--unless one considers choosing to 
live in a high-tax state or choosing to have children to be a tax-
avoidance motive. For 2004, the Treasury Department found that fully 68 
percent of aggregate AMT tax preference dollars were attributable to 
the disallowance of the state and local tax deduction and 19 percent of 
aggregate AMT tax preference dollars were attributable to the 
disallowance of personal exemptions.\5\ Thus, about 87 percent of the 
additional income subject to tax under the AMT results simply because 
of taxpayers' place of residence or family composition.
---------------------------------------------------------------------------
    \5\ Office of Tax Analysis, Department of the Treasury (unpublished 
tabulation), cited at http://www.taxpolicycenter.org/TaxFacts/TFDB/
Content/PDF/amt_preference.pdf.
---------------------------------------------------------------------------
    Moreover, the AMT is now affecting increasing numbers of middle-
income taxpayers, because the amount of income exempt from the AMT (the 
AMT ``exemption amount'') is not indexed for inflation. When Congress 
first enacted a minimum tax in 1969, the exemption amount was $30,000 
for all taxpayers. If Congress had 

indexed that amount, it would be equal to about $165,000 today.\6\ 
Instead, the exemption amounts, after temporary increases that expired 
at the end of 2006, are $45,000 for married taxpayers and $33,750 for 
most other taxpayers.\7\ As a result, it is now projected that in 2007, 
absent a change in law, 23.4 million individual taxpayers--or about 26 
percent of individual filers who pay income tax--will be subject to the 
AMT.\8\ Among the categories of taxpayers hardest hit, 89 percent of 
married couples with adjusted gross incomes between $75,000 and 
$100,000 and two or more children will owe AMT.\9\
---------------------------------------------------------------------------
    \6\ Department of Labor, Bureau of Labor Statistics, Consumer Price 
Index--All Urban Consumers (CPI-U) (as of Oct. 31, 2006). Congress 
acted after hearing testimony that 155 taxpayers with adjusted gross 
incomes above $200,000 had paid no federal income tax for the 1966 tax 
year. See The 1969 Economic Report of the President: Hearings before 
the Joint Economic Comm., 91st Cong., pt. 1, p. 46 (1969) (statement of 
Joseph W. Barr, Secretary of the Treasury). The consumer price index 
has increased more than six fold since 1966, so the kinds of taxpayers 
who caught Congress' attention back then would be making over 1.25 
million today. See Department of Labor, Bureau of Labor Statistics, 
Consumer Price Index--All Urban Consumers (CPI-U) (as of Oct. 31, 
2006). Yet the AMT today is not primarily affecting taxpayers with 
incomes over $1.25 million. By 2010, it has been estimated that 82 
percent of all taxpayers affected by the AMT will have incomes under 
$200,000--and 36 percent will have incomes under $100,000. Greg 
Leiserson & Jeffrey Rohaly, The Individual Alternative Minimum Tax: 
Historical Data and Projections updated November 2006, table 5 (Nov. 
10, 2006) (available at www.taxpolicycenter.org or on Lexis/Nexis at 
2006 TNT 219-50).
    \7\ IRC Sec. 55(d).
    \8\ Greg Leiserson & Jeffrey Rohaly, The Individual Alternative 
Minimum Tax: Historical Data and Projections updated November 2006, 
table 1 (Nov. 10, 2006) (available at www.taxpolicycenter.org or on 
Lexis/Nexis at 2006 TNT 219-50).
    \9\ Greg Leiserson & Jeffrey Rohaly, The Individual Alternative 
Minimum Tax: Historical Data and Projections updated November 2006, 
table 3 (Nov. 10, 2006) (available at www.taxpolicycenter.org or on 
Lexis/Nexis at 2006 TNT 219-50).
---------------------------------------------------------------------------
    The burden that the AMT imposes is substantial. In dollar terms, it 
is estimated that each AMT taxpayer will owe, on average, an additional 
6,782 in tax in 2006.\10\ In terms of complexity and time, taxpayers 
often must complete a 16-line worksheet,\11\ read ten pages of 
instructions,\12\ and complete a 55-line form \13\ simply to determine 
whether they are subject to the AMT. Thus, it is hardly surprising that 
77 percent of AMT taxpayers hire practitioners to prepare their 
returns.\14\
---------------------------------------------------------------------------
    \10\ Greg Leiserson & Jeffrey Rohaly, The Individual Alternative 
Minimum Tax: Historical Data and Projections updated November 2006, 
table 4 (Nov. 10, 2006) (available at www.taxpolicycenter.org or on 
Lexis/Nexis at 2006 TNT 219-50).
    \11\ IRS Form 1040, Individual Income Tax Return, Instructions at 
39 (2006).
    \12\ IRS Form 6251, Alternative Minimum Tax--Individuals, 
Instructions (2006).
    \13\ IRS Form 6251, Alternative Minimum Tax--Individuals (2006).
    \14\ IRS Compliance Data Warehouse, Individual Returns Transaction 
File (IRTF), Tax Year 2004.
---------------------------------------------------------------------------
    Perhaps most disturbingly, it is often very difficult for taxpayers 
to determine in advance whether they will be hit by the AMT. As a 
result, many taxpayers are unaware that the AMT applies to them until 
they receive a notice from the IRS, and some discover they have AMT 
liabilities that they did not anticipate and cannot pay. To make 
matters worse, the difficulty of projecting AMT tax liability in 
advance makes it challenging for taxpayers to compute and make required 
estimated tax payments, which often results in these taxpayers being 
subject to penalties.
    At some point very soon, by one estimate as early as in 2007, we 
will reach a point where it will cost more for Congress to repeal the 
AMT than to repeal the regular tax and leave the AMT intact.\15\ In a 
very real sense, then, the AMT is ceasing to fulfill its intended 
mission to prevent tax avoidance by the wealthy and is instead becoming 
the de facto tax system for millions of Americans. The obvious 
challenge in repealing the AMT is that its increasing revenue stream 
has been built into revenue estimates, so if it is repealed, either 
Congress will have to raise tax receipts in other ways or budget 
deficits will balloon. These alternatives admittedly are not appealing, 
but I have no doubt there are solutions that are far preferable to the 
status quo. Significantly, the longer Congress waits to act, the more 
dependent the government will become on AMT revenue and the harder it 
therefore will become to repeal it.
---------------------------------------------------------------------------
    \15\ Because of differing assumptions, estimates of when this 
crossover point will occur vary. The most recent modeling by the Tax 
Policy Center (TPC), a joint venture of the Urban Institute and the 
Brookings Institution, projects it will occur in 2007. Greg Leiserson & 
Jeffrey Rohaly, The Individual Alternative Minimum Tax: Historical Data 
and Projections updated November 2006, at 4 (Nov. 10, 2006) (available 
at www.taxpolicycenter.org or on Lexis/Nexis at 2006 TNT 219-50). The 
Treasury Department is projecting the crossover will occur in 2013. 
Office of Tax Analysis, Department of the Treasury (unpublished 
tabulation). Based on our conversations with Treasury and TPC 
economists, we understand that the TPC model assumes that tax credits 
that can be used against the AMT, including the child tax credit and 
the earned income tax credit, would be repealed along with the regular 
income tax. The Treasury Department did not assume these credits would 
be repealed along with the regular income tax.
---------------------------------------------------------------------------
    While the concept of a minimum tax is not unreasonable, the AMT as 
currently structured has morphed into something that was never 
intended: It is penalizing taxpayers for such nontax-driven behavior as 
having children or selecting a state of residence; it is hitting 
taxpayers it was never intended to hit because its exemption amount has 
not been indexed for inflation; it is taking large numbers of taxpayers 
by surprise--and subjecting them to penalties to boot; it is imposing 
onerous compliance burdens; it is altering the distribution of the tax 
burden that exists under the regular tax system; it is changing the tax 
incentives built into the regular tax system; and it is neutralizing 
the effects of changes to tax rates imposed under the regular tax 
system.
Background of the AMT
    The concept of a minimum tax was initially developed in response to 
reports that a small, wealthy group of taxpayers was avoiding taxes 
altogether through the use of tax avoidance techniques.\16\ In 1969, 
the House of Representatives adopted recommendations of the Treasury 
Department and passed a bill to impose a minimum tax by limiting 
certain tax preference items, in the aggregate, to 50 percent of gross 
income.\17\ This approach required the use of a complex formula 
designed to allocate itemized deductions between taxable income and 
non-taxable income and to disallow those deductions allocated to non-
taxable income.\18\
---------------------------------------------------------------------------
    \16\ The 1969 Economic Report of the President: Hearings before the 
Joint Economic Comm., 91st Cong., pt. 1, p. 46 (1969) (statement of 
Joseph W. Barr, Secretary of the Treasury); Committee on Ways and Means 
of the U.S. House of Representatives and Committee on Finance of the 
U.S. Senate, 91st Cong., Tax Reform Studies and Proposals, U.S. 
Treasury Department, pt. 1, p. 132 (Comm. Print 1969).
    \17\ H.R. 13270, Sec. 301(a) (version passed by the House of 
Representatives on Aug. 8, 1969).
    \18\ See H.R. Conf. Rep. No. 91-782, p. 301 (1969).
---------------------------------------------------------------------------
    The Senate changed the bill, adopting instead a tax on specified 
preference items in excess of a $30,000 exemption amount.\19\ The final 
bill followed the Senate's approach and imposed an add-on tax of 10 
percent on nine specific tax preference items when the sum of the 
preference items exceeded $30,000.\20\
---------------------------------------------------------------------------
    \19\ H.R. 13270 (substituted version passed by the Senate on Dec. 
11, 1969).
    \20\ Tax Reform Act, Pub. L. No. 91-172, Sec. 301 (1969). The nine 
specified tax preference items were (1) excess investment interest 
income, (2) accelerated depreciation on personal property, (3) 
accelerated depreciation on real property, (4) amortization of 
certified pollution control facilities, (5) amortization of railroad 
rolling stock, (6) tax benefits from stock options, (7) bad debt 
deductions of financial institutions, (8) depletion, and (9) the 
deduction for capital gains.
---------------------------------------------------------------------------
    The Tax Reform Act of 1976 and the Revenue Act of 1978 both made 
modifications to the add-on tax. The 1976 Act, among other things, 
increased the add-on tax rate to 15 percent and lowered the exemption 
amount from $30,000 to the greater of $10,000 or one-half of regular 
tax liability.\21\ The 1976 Act also added a new preference item for 
``excess itemized deductions'' equal to the amount by which itemized 
deductions (other than medical and casualty deductions) exceeded 60 
percent of adjusted gross income.\22\ The 1978 Act went a step further, 
restructuring the tax into two components. The add-on tax was retained 
for all tax preferences except the capital gains deduction and excess 
itemized deductions, and a new alternative minimum tax was established 
to adjust the taxpayer's income for these two items of tax preference. 
This new alternative minimum tax (AMT) imposed a progressive three-
tiered rate structure on AMT: 10 percent on AMT income between $20,001 
and $60,000; 20 percent on AMT income between $60,001 and $100,000; and 
25 percent on AMT income over $100,000.\23\
---------------------------------------------------------------------------
    \21\ Tax Reform Act, Pub. L. No. 94-455, Sec. 301 (1976).
    \22\ Id.
    \23\ Revenue Act, Pub. L. No. 95-600, Sec. 421 (1978).
---------------------------------------------------------------------------
    In 1982, Congress repealed the add-on tax but left the AMT 
intact.\24\ Although Congress has enacted many technical changes over 
the past 25 years, the basic structure of the AMT rules has remained 
intact.
---------------------------------------------------------------------------
    \24\ Tax Equity and Fiscal Responsibility Act, Pub. L. No. 97-248, 
Sec. 402(a) (1982).
---------------------------------------------------------------------------
How the AMT Is Computed
    The AMT's method of calculation vividly demonstrates its 
complexity. The AMT requires a separate set of computations from the 
regular income tax, with unique rules governing the recognition of 
income and the timing of deductions and credits. Taxpayers are often 
required to maintain two sets of records--one for regular income tax 
purposes and one for AMT purposes.
    The determination of AMT liability, if any, involves an eight-step 
process:

    1.  The taxpayer must calculate his regular tax liability. The 
regular income tax rules provide preferred treatment for certain types 
of income and allow taxpayers to claim certain exemptions, deductions, 
exclusions and credits.
    2.  The taxpayer must determine whether he is subject to additional 
tax under the AMT regime. The IRS provides a 16-line worksheet 
(Worksheet To See if You Should Fill in Form 6251--Line 45) \25\ to 
help taxpayers determine whether they may be subject to the AMT. If the 
worksheet indicates that a taxpayer is potentially subject to the AMT, 
the taxpayer must complete Form 6251 (Alternative Minimum Tax--
Individuals), which contains 55 lines. Many taxpayers are required to 
complete Form 6251--only to find that they do not have an AMT 
liability.
---------------------------------------------------------------------------
    \25\ IRS Form 1040, Individual Income Tax Return, Instructions at 
39 (2006).
---------------------------------------------------------------------------
    3.  The taxpayer must compute his alternative minimum taxable 
income (AMTI) on Form 6251. This computation generally requires 
taxpayers to give up the benefit of tax preference items to which they 
are entitled under the regular tax system (e.g., dependency exemptions, 
a standard deduction, and itemized deductions for state and local 
taxes, employee business expenses and legal fees).\26\
---------------------------------------------------------------------------
    \26\ Required adjustments listed on Form 6251 include adjustments 
for medical and dental expenses, state and local taxes, certain non-
allowable home mortgage interest, miscellaneous itemized deductions, 
tax refunds, investment interest, depletion, certain net operating 
losses, interest from specified private activity bonds, qualified small 
business stock, the exercise of incentive stock options, estates and 
trusts, electing large partnerships, property dispositions, 
depreciation on certain assets, passive activities, loss limitations, 
circulation costs, long-term contracts, mining costs, research and 
experimental costs, income from pre-1987 installment sales, intangible 
drilling costs, certain other adjustments and alternative tax net 
operating loss deductions. See IRC Sec. Sec. 56 and 57; IRS Form 6251 
(Alternative Minimum Tax--Individuals), Part I.
---------------------------------------------------------------------------
    4.  The taxpayer must determine an ``exemption amount'' to which he 
is entitled based on filing status. After temporary increases in the 
AMT exemption amounts in recent years that have now expired, the AMT 
exemption amounts for 2007 stand at $45,000 for married taxpayers and 
33,750 for most other taxpayers.\27\ The exemption amounts are phased 
out for married taxpayers with AMTI exceeding $150,000 and non-married 
taxpayers with AMTI exceeding $112,500.\28\
---------------------------------------------------------------------------
    \27\ IRC Sec. 55(d).
    \28\ IRC Sec. 55(d)(3).
---------------------------------------------------------------------------
    5.  The taxpayer must compute his ``taxable excess'' by subtracting 
the exemption amount from his AMTI.
    6.  A taxpayer with a positive ``taxable excess'' must compute his 
``tentative minimum tax.'' A ``taxable excess'' of $175,000 or less is 
taxed at a 26 percent rate and any additional ``taxable excess'' is 
taxed at a 28 percent rate. The sum of the two amounts, minus the 
alternative minimum tax foreign tax credit, is the ``tentative minimum 
tax.'' \29\
---------------------------------------------------------------------------
    \29\ IRC Sec. 55(b)(1)(A).
---------------------------------------------------------------------------
    7.  The taxpayer must compute his ``alternative minimum tax'' or 
``AMT.'' The AMT is equal to the excess of the taxpayer's tentative 
minimum tax, if any, over his regular tax liability (reduced by any tax 
from Form 4972 (Tax on Lump Sum Distributions) and any foreign tax 
credit from Form 1040). If the net result is a negative number or zero, 
the taxpayer does not owe AMT.
    8.  If the taxpayer owes AMT, he computes his tax liability by 
adding his regular tax liability and his AMT liability.\30\
---------------------------------------------------------------------------
    \30\ In many cases, the taxpayer's final tax liability is simply 
the greater of his regular tax liability or his tentative minimum tax 
liability. But because the Code requires adjustments for credits and 
other taxes, the Seventh and Eighth steps are required to ensure that 
taxpayers with these tax items obtain the correct result.

    A taxpayer's AMT liability may result in an AMT credit.\31\ In 
general, an AMT credit may be used in the future when the taxpayer's 
regular tax liability, reduced by other nonrefundable credits, exceeds 
the taxpayer's tentative minimum tax for the year.\32\ However, a 
taxpayer who owes AMT generates an AMT credit only to the extent the 
credit is caused by ``deferral'' items and not by ``exclusion'' items. 
Deferral items are those that are accounted for in different tax years 
in the regular tax and AMT systems. For example, the AMT in some 
instances requires taxpayers to depreciate property over a longer 
period of time. Exclusion items are adjustments and tax preference 
items that result in the permanent disallowance of certain tax benefits 
such as the standard deduction, personal exemptions and certain 
itemized deductions. Thus, many individual taxpayers who owe AMT will 
never be able to use an AMT credit.
---------------------------------------------------------------------------
    \31\ IRC Sec. 53.
    \32\ Beginning in 2007, an individual with a long-term unused AMT 
credit may be able to use a portion of his AMT credit in a taxable year 
in which he, as a result of the tentative minimum tax limitation, 
otherwise could not use it. For 2007, a long-term unused AMT credit is 
an AMT credit that was generated before 2004. IRC Sec. 53(e).
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Problems with the AMT
    At the risk of some redundancy, the following is a concise list of 
some of the most significant problems relating to the AMT:

      Impact on ``Wrong'' Taxpayers. The AMT no longer targets 
just wealthy taxpayers engaged in tax avoidance. The number of AMT 
filers is projected to grow to 32.4 million by 2010.\33\ Among 
taxpayers with incomes between $100,000 and $200,000, a staggering 80 
percent will be subject to the AMT.\34\ Even more notable, the AMT will 
affect a higher percentage of taxpayers with incomes between $75,000 
and $100,000 (50 percent) than taxpayers making more than $1 million 
(39 percent).\35\
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    \33\ Greg Leiserson & Jeffrey Rohaly, The Individual Alternative 
Minimum Tax: Historical Data and Projections updated November 2006, 
table 1 (Nov. 10, 2006) (available at www.taxpolicy center.org or on 
Lexis/Nexis at 2006 TNT 219-50).
    \34\ Id. at table 3.
    \35\ Id. at table 3.
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      Lack of AMT Knowledge. Taxpayers often file their returns 
not knowing about the AMT or expecting to be subject to it, but then 
receive bills relating to the AMT that they are not prepared to pay. In 
fiscal year 2005, the IRS closed more than 21,500 examinations that 
were initiated because of suspected AMT liabilities. These examinations 
resulted in additional tax assessments of nearly $39 million--about 
$1,700 per return.\36\
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    \36\ IRS Wage & Investment Operating Division, Audit Information 
Management System (FY 2005 data).
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      Complexity. The individual AMT computations are 
completely separate from the regular income tax computations. As 
described above, taxpayers may need to fill out a 16-line worksheet and 
then a 55-line form (IRS Form 6251, Alternative Minimum Tax--
Individuals) just to determine whether they are subject to AMT. Other 
complexities of the AMT include the re-computation of the foreign tax 
credit,\37\ its effects on incentive stock options \38\ and capital 
gains rates,\39\ and the treatment of income of minor children (the so-
called ``kiddie tax'').\40\
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    \37\ IRC Sec. 59(a).
    \38\ IRC Sec. 56(b)(3).
    \39\ IRC Sec. 55(b)(3).
    \40\ IRC Sec. 59(j).
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      Failure to Index AMT Exemptions for Inflation. Regular 
income tax standard deductions, exemptions and filing thresholds are 
all adjusted for inflation. As discussed above, however, the AMT 
exemption amounts are not. The absence of an AMT indexing provision is 
largely responsible for the increasing numbers of middle-class 
taxpayers who are subject to the AMT regime.\41\
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    \41\ The effect of the absence of AMT-exemption indexing is 
compounded by the fact that key tax preference items that are included 
in AMTI--e.g., the standard deduction and personal exemptions--are 
indexed annually.
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      Adverse Impact on Families. Married taxpayers will be 
almost 15 times as likely as single taxpayers to pay AMT in 2007.\42\ 
One study projected that approximately 5.7 million taxpayers will pay 
AMT in 2010 simply because they lose the benefit of personal exemptions 
under the AMT.\43\
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    \42\ Greg Leiserson & Jeffrey Rohaly, The Individual Alternative 
Minimum Tax: Historical Data and Projections updated November 2006, 
table 3 (Nov. 10, 2006) (available at www.taxpolicy center.org or on 
Lexis/Nexis at 2006 TNT 219-50).
    \43\ Leonard E. Burman, William G. Gale & Jeffery Rohaly, The AMT: 
Projections and Problems, Tax Notes, July 7, 2003, pp. 105-106 
(available at www.taxpolicycenter.org).
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      Loss of Itemized Deductions. An individual taxpayer must 
add back certain itemized deductions when computing the AMT.\44\ This 
adjustment causes particular difficulties for taxpayers with large 
expenditures such as medical bills, legal fees in court settlements, 
state and local taxes, or employee business expenses.
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    \44\ IRC Sec. 56(b) & (e). Common itemized deductions that must be 
added back to income include, but are not limited to, state and local 
taxes, real estate and personal property taxes, mortgage interest not 
used for the purchase or improvement of a personal residence, medical 
expenses exceeding 7.5 percent but less than 10 percent of adjusted 
gross income, and certain miscellaneous itemized deductions such as 
employee business expenses and legal fees.
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      Unpredictability of Estimated Tax Payments. Because the 
law is so complicated, it is difficult, if not impossible, to predict 
whether an individual will be subject to the AMT. This uncertainty 
causes problems in paying the correct estimated tax for the year and 
can result in penalties for underpayment. In tax year 2004, for 
example, 17.1 percent of AMT returns reported an estimated tax penalty 
on the return as compared with 3.7 percent of non-AMT returns.\45\
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    \45\ IRS Compliance Data Warehouse, Individual Returns Transaction 
File (IRTF), Tax Year 2004.
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      Taxation of Incentive Stock Options. A taxpayer's 
exercise of incentive stock options creates a paper (phantom) gain in 
the year the stock is purchased (i.e., the option exercise). This gain 
is not taxed under the regular tax rules but is taxed for AMT purposes. 
The gain is the difference between the option price and the market 
value of the stock on the date the option is exercised to purchase the 
shares.
      Limitation on Availability of General Business Credits. 
Most general business tax credits are limited by the taxpayer's 
tentative minimum tax.\46\ To illustrate, assume a taxpayer has a 
regular tax liability of $10,000 prior to credits, tentative minimum 
tax of $9,000, and a $2,000 credit under IRC Sec. 44 for constructing 
an access ramp to his business for disabled individuals. Absent the 
credit, the AMT has no effect on this taxpayer because his regular tax 
liability exceeds his tentative minimum tax. However, the disabled 
access credit would reduce the taxpayer's regular tax liability to 
$8,000, which is below his tentative minimum tax. Therefore, the 
taxpayer is only entitled to a credit amount of $1,000 and must carry 
back or carry forward the $1,000 credit balance. Under these 
circumstances, the taxpayer is required to complete Form 6251 and 
attach it to his return--even though the taxpayer does not have an AMT 
liability--to substantiate his entitlement to a portion of the credit. 
The Treasury Department estimates that taxpayers will lose nearly $13 
billion in tax credits, mostly business credits, in 2010 because of the 
AMT.\47\
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    \46\ IRC Sec. 38(c)(1).
    \47\ Office of Tax Analysis, Department of the Treasury 
(unpublished tabulation); IRC Sec. 55(c)(2).
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      Timing Issues Resulting from AMT Tax Credit Regime. The 
portion of AMT attributable to timing items reflects the difference 
between when certain deductions are allowable under the AMT and when 
the same deductions are allowable under the regular income tax. The 
taxpayer can claim an AMT credit only in subsequent years when the 
regular tax exceeds the AMT.
      Requirement of Two Sets of Records. Taxpayers often must 
keep separate records for regular tax and AMT purposes. For example, 
assume a taxpayer placed an office building into service prior to 1999 
and is claiming straight-line depreciation on the building. The 
taxpayer must depreciate the building over a 39-year period for regular 
tax purposes,\48\ but for AMT purposes the depreciation period is 40 
years.\49\
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    \48\ IRC Sec. 168(c).
    \49\ IRC Sec. 56(a)(1)(A)(i) (referencing IRC Sec. 168(g)).
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      Inconsistent Treatment of Carryover Items. When a 
taxpayer loses a tax benefit because of the AMT, the taxpayer may or 
may not be entitled to carry the benefit to another tax year, and the 
carryover periods vary from item to item. For example, an unused credit 
otherwise allowable for placing an alternative motor vehicle into 
service may not be carried over if the motor vehicle is not used in a 
trade or business.\50\ Thus, if the vehicle is for personal use, any 
credit that cannot be used in the year in which the vehicle is placed 
into service is permanently lost. Unused general business credits, on 
the other hand, generally may be carried back one year and carried 
forward 20 years.\51\ By contrast, unused foreign tax credits generally 
may be carried back one year and carried forward ten years.\52\
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    \50\ A credit may be carried to another taxable year only if the 
Code expressly provides for it. In the case of the credit for 
alternative motor vehicles, carryovers are authorized only if the 
vehicle is used in a trade or business and is subject to depreciation. 
See IRC Sec. 30B(g).
    \51\ IRC Sec. 39(a).
    \52\ IRC Sec. 904(c).
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      Two Computations of Capital Gains Tax. Capital gains are 
taxed for regular tax purposes at lower rates than the AMT rates. 
Because Congress wanted to preserve tax-favored capital gains treatment 
under the AMT regime, a taxpayer with capital gains who owes AMT must 
complete 20 lines on Form 6251 after having already completed a 
Schedule D (Capital Gains and Losses) for regular tax purposes.
      Increased Use of Paid Preparers. Approximately 60 percent 
of taxpayers without AMT liabilities pay to have their returns 
prepared.\53\ Where a taxpayer has an AMT liability, the use of paid 
preparers jumps to 77 percent.\54\
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    \53\ IRS Compliance Data Warehouse, Individual Returns Transaction 
File (IRTF), Tax Year 2004.
    \54\ IRS Compliance Data Warehouse, Individual Returns Transaction 
File (IRTF), Tax Year 2004.
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      High AMT Marginal Tax Rates Due to Phase-out of AMT 
Exemption. As described above, the AMT rules impose tax at a rate of 26 
percent on a ``taxable excess'' (i.e., AMTI reduced by the applicable 
AMT exemption amount) up to $175,000 and 28 percent on higher amounts. 
However, the AMT exemptions phase out at a 25 percent rate for married 
taxpayers with AMTI exceeding $150,000 and non-married taxpayers with 
AMTI exceeding $112,500.\55\ Therefore, the AMT marginal tax rate can 
reach 35 percent.
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    \55\ IRC Sec. 55(d)(3).

Examples of AMT Impact
    The following examples illustrate the impact of the AMT in four 
situations: \56\ These examples illustrate common AMT issues we have 
seen in the Taxpayer Advocate Service, but they do not represent the 
facts of any particular case.
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    \56\ These examples illustrate common AMT issues we have seen in 
the Taxpayer Advocate Service, but they do not represent the facts of 
any particular case.
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    AMT Penalty for Having Children: The (modified) Brady Bunch. Mr. 
and Mrs. Brady live in California in a rented home with their six 
children, ages 5-16. They claim the ``married filing jointly'' filing 
status and take the $10,300 standard deduction in 2006. Mr. Brady, an 
architect, made $73,160. Mrs. Brady worked part-time as a teacher and 
earned $25,000. The Bradys owe $2,424 in taxes under the regular tax 
system, but their tax bill rises to $3,199 with the AMT because the tax 
benefits of the personal exemptions for their children are phased out 
under the AMT.
    AMT Marriage Penalty. Assume the same facts as in the prior example 
except that Mr. and Mrs. Brady did not marry. If each used the ``Head 
of Household'' filing status and claimed their own three children, the 
AMT would not apply to either of them and their combined tax bill would 
be lower. Mrs. Brady would pay no tax and get $4,500 in refundable 
credits (a $2,385 EITC credit, a $2,055 child tax credit, and a $60 
credit for federal telephone excise tax paid), and Mr. Brady would pay 
tax of $5,404. Their combined tax liability would be $904 (i.e., $5,404 
minus $4,500)--or $2,295 less than their tax liability if they were 
married. Part of the difference in tax in these two examples is 
attributable to the general marriage penalty, but a significant portion 
is attributable solely to the AMT.
    AMT Penalty for High State and Local Taxes. A taxpayer filed a 
joint return claiming two dependent children for 2006. The taxpayer had 
an adjusted gross income of $190,000 and paid state income and property 
taxes totaling $28,000. The taxpayer had 90 percent of his regular tax 
liability withheld from his paycheck. When the taxpayer prepared his 
return, he discovered that he had an additional tax liability of $4,448 
due to the AMT. Because of the additional AMT tax liability, he also 
owed a penalty for failure to pay estimated tax in the amount of $210.
    AMT Penalty Due to Combination of Having Children and Using 
``Married Filing Separately'' Filing Status. A mother of five earned 
$57,500 in 2006. She is seeking a legal separation from her husband and 
lived apart from him during the final months of the year and thus 
claimed ``married filing separately'' filing status. Because she was 
entitled to claim the children as her dependents and to claim the child 
tax credit, she had no tax liability under the regular tax rules. She 
therefore did not have any tax withheld from her paychecks. When she 
prepared her tax return, however, she discovered that she had a tax 
liability of $1,909 due to the AMT. Because of the AMT tax liability, 
she also owed a penalty for failure to pay estimated tax in the amount 
of $93.
Conclusion
    To be viewed as fair, a tax system must be transparent. Yet the 
complexity of the AMT is such that many if not most taxpayers who owe 
the AMT do not realize it until they prepare their returns. It adds 
insult to injury when many of these taxpayers discover that they also 
owe a penalty for failure to pay sufficient estimated tax because they 
did not factor in the AMT when they computed their withholding 
exemptions or estimated tax payments. Taxpayers subjected to this 
treatment may wonder whether their government is dealing fairly with 
them. To say the least, ``gotcha'' taxation is not good for taxpayers 
or the tax system.
    Clearly, there are many practical, policy, and political challenges 
to repealing the individual AMT. But these challenges will continue to 
grow over time as the government, absent congressional action, becomes 
increasingly dependent on AMT revenue. With all the problems inherent 
in the AMT, I don't think taxpayers will stand for it when the AMT 
begins to hit tens of millions of taxpayers within the next few years. 
The AMT is a time bomb, and it is set to detonate very soon. I strongly 
urge Congress to act before the AMT explosion.

                                 

    Chairman NEAL. Thank you very much, Ms. Olson. Dr. Burman.

  STATEMENT OF LEONARD E. BURMAN, PH.D., DIRECTOR, TAX POLICY 
 CENTER, A JOINT VENTURE OF THE URBAN INSTITUTE AND BROOKINGS 
                          INSTITUTION

    Mr. BURMAN. Thank you, Mr. Chairman. Chairman Neal, Ranking 
Member English, Members of the Subcommittee, thank you for 
inviting me to share my views on the individual AMT, and thank 
you, Mr. Chairman and Mr. Ranking Member, for your leadership 
on this issue.
    In January 1969, Treasury Secretary Joseph Barr testified 
that 155 high-income individual taxpayers had paid no Federal 
income tax in 1966. The news created a political firestorm. 
Members of Congress received more constituent letters about 
those 155 taxpayers than about the Vietnam War.
    Law makers could have responded in one of three ways. They 
could have explained that the non-taxpayers were taking 
advantage of tax incentives that advanced worthwhile social 
objectives, and thus, should not have to owe tax. That would 
have been a hard sell.
    They could have closed the loopholes that allowed rich 
people to avoid tax, but those loopholes had some pretty 
powerful constituencies, so that didn't happen either.
    Instead, Congress decided to create an extra tax for high-
income people who didn't pay enough under the regular income 
tax system to avoid such embarrassing disclosures in the 
future. Thus was born the AMT.
    It was a bad choice. The AMT doesn't do much to reign in 
tax shelters. Given the poor design, millionaires are actually 
less likely to owe AMT than middle income people with kids. 
It's inefficient, and it undermines support for the tax system 
because it's the poster child for pointless complexity. 
Taxpayers can't understand it, but they think it's unfair.
    Before getting into how to fix the AMT, I would like to 
address a couple of shibboleths. One, the AMT is virtually a 
flat tax with low rates of 26 and 28 percent. No. Those are the 
rates written into the law, but because the AMT exemption 
phases out with income, as Eric mentioned, the effective rates 
actually go as high as 35 percent, and they don't even apply to 
the highest-income taxpayers. Since the highest rates don't 
apply to the highest income people, the AMT hits almost 
everyone with incomes between $200,000 and $500,000, but not 
many millionaires.
    Another one. Since the AMT is becoming the de facto tax 
system, why not just eliminate the regular income tax? The AMT 
would be a terrible tax system. First, high tax rates apply at 
relatively modest incomes, and high-income people would get a 
big rate cut from 35 percent to 28 percent.
    Second, there are horrendous marriage and child penalties.
    Third, it isn't indexed for inflation, so it causes 
people's average tax bills to increase every year, even if 
their real incomes weren't changing.
    Another one is that software and paid preparers make AMT 
complexity no big deal. There are at least three problems with 
this argument. First, as the AMT consumes the middle class, it 
will hit more and more people who do their taxes by hand--or 
try.
    Second, even with software, it's complex, as I explained in 
my written testimony.
    Third, you might want people to understand how the tax 
system affects them. With the AMT, the tax system becomes an 
inscrutable black box.
    It's not the Bush tax cuts that have pushed people under 
the AMT, but the failure to index for inflation. Actually, it's 
both. It's certainly true that the AMT was on a path to cause 
problems even before the 2001 tax cuts were enacted, but EGTRRA 
doubled the problem. Without the tax cut, 16 million people 
would be on the AMT in 2010, which is way too many, but with 
the tax cut, the number balloons to 32 million. Cutting the 
regular income tax without fixing the AMT at the same time is 
the tax policy equivalent of throwing gasoline on a fire.
    The AMT is a blue state tax. Although in 2006, it's true 
that taxpayers in relatively high-income high-tax coastal 
States are more likely to owe AMT than those in the interior, 
the AMT is going to hit people in all States hard if it isn't 
fixed. It might be better to call it a soccer mom tax, or a 
swing voter tax.
    It's in all of your interests to do something about it. So, 
what should we do?
    A serious fix to the AMT would, at a minimum, adjust it for 
inflation and retarget it at the higher income people who are 
intended to pay it. The ideal solution might be to repeal the 
tax, and include any valid anti-tax shelter provisions in the 
regular income tax.
    The problem, as you're all painfully aware, is that any of 
these solutions would reduce Federal tax revenues dramatically, 
and repeal would be very regressive--96 percent of the benefits 
would go to the top fifth of the income distribution.
    We have looked at a number of options to pay for reform, 
including an increase in top income tax rates, elimination of 
the AMT tax preference for capital gains and dividends, or 
repeal of the deduction for State and local taxes under the 
regular income tax.
    Eliminating the tax break for capital gains and dividends 
has considerable merit. Prior to 1987, the tax break on capital 
gains was the single largest tax preference under the AMT. If 
the purpose of the AMT is to limit tax shelters, this makes 
sense, since virtually any individual income tax shelter you 
can imagine involves converting ordinary income into lightly 
taxed capital gains or dividends. Taxing gains and dividends 
under the AMT would also be highly progressive.
    The President's tax reform panel proposed eliminating State 
and local tax deduction. I know that causes shudders of horror 
among people who live in high tax States, but your constituents 
are losing this break anyway because of the AMT, and it's 
becoming increasingly just a tax deduction for very high-income 
people who aren't subject to the AMT.
    Any of these changes would make the tax system more 
progressive, and they wouldn't add to the deficit. I understand 
that fixing the AMT isn't easy. If it were, it would have 
happened a long time ago, but I applaud the Subcommittee for 
taking the first steps toward what I hope will be a permanent 
solution.
    [The prepared statement of Mr. Burman follows:]
 Statement of Leonard E. Burman, Ph.D, Director, Tax Policy Center, a 
     joint venture of the Urban Institute and Brookings Institution
    Chairman Neal, Ranking Member English, Members of the Subcommittee: 
Thank you for inviting me to share my views \1\ on the individual 
alternative minimum tax.
    A precursor to the current individual alternative minimum tax (AMT) 
was originally enacted in 1969 to limit the amount of tax sheltering 
that taxpayers could pursue and to assure that high-income filers paid 
at least a minimal amount of tax.\2\ The current AMT, however, has 
strayed far from those original goals. Under current law, the tax will 
affect more than 23 million taxpayers in 2007, mainly for reasons that 
have little or nothing to do with what most people would consider tax 
sheltering. The AMT is expected to generate more than 800 billion in 
revenue over the next ten years under current law, a figure that rises 
to 1.5 trillion if the 2001-2006 tax cuts are extended. In short, the 
AMT threatens to grow from a footnote in the tax code to a major 
component affecting tens of millions of taxpayers every year.
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    \1\ My testimony draws heavily on joint work with my Tax Policy 
Center colleagues, Jeff Rohaly, Greg Leiserson, and Bill Gale. Views 
expressed are my own.
    \2\ The original minimum tax was an addition to regular income tax. 
The current AMT is a floor on total tax liability. For details, see 
Joint Committee on Taxation (2007) or Burman, Gale, and Rohaly (2005).
---------------------------------------------------------------------------
    My testimony will outline how the AMT works, whom it affects, and 
why it demands attention. I will also discuss possible ways of 
reforming the AMT and why financing AMT reform or repeal is important. 
I finish with some concluding observations.
How does the AMT Work?
    The individual AMT operates parallel to the regular income tax with 
a different income definition, rate structure, and allowable 
deductions, exemptions, and credits. In short, after calculating 
regular tax liability, taxpayers must calculate their ``tentative AMT'' 
under the alternative rules and rates and pay whichever amount is 
larger. To calculate tentative AMT, taxpayers must first determine 
their alternative minimum taxable income (AMTI) and then subtract the 
applicable AMT exemption amount (which is subject to phase-out), 
calculate tax under the AMT rate schedule, and subtract any applicable 
credits. Technically, AMT liability is the excess, if any, of tentative 
AMT above the amount of taxes due under the regular income tax alone.
    Alternative minimum taxable income is the sum of three components: 
regular taxable income for AMT purposes, AMT preferences, and AMT 
adjustments. Regular taxable income for AMT purposes is basically the 
same as taxable income used for regular tax purposes, except it is 
allowed to be negative if deductions exceed gross income.
    An AMT preference is an item identified as a potential tax saving 
in the regular income tax that is not permitted in the AMT. An AMT 
adjustment is simply any other exclusion, exemption, deduction, credit, 
or other treatment (such as a method for computing depreciation) in the 
regular income tax that is either restricted or disallowed in the AMT. 
Because there is generally no interesting economic distinction between 
preferences and adjustments, I will refer to both as preferences.
    Interesting distinctions emerge among the various preferences 
themselves, however. Preferences are of two types: exemptions or 
deferrals. Exemption preferences broaden the AMT tax base and include 
the disallowance of personal exemptions, the standard deduction, and 
itemized deductions for miscellaneous expenses and state and local 
taxes. Deferral provisions change the timing of the recognition of 
income and deductions, typically to accelerate income and postpone 
deductions. Thus, they tend to raise the current-year tax base--and 
hence revenues--but only at the expense of future tax bases and tax 
collections.
    Middle-income AMT taxpayers are primarily affected by the exemption 
preferences, which are added to taxable income. The exemption measures 
might be interpreted as an effort to reduce tax incentives generally 
and move toward an alternative tax base that is broader than the 
regular income tax base.
    Deferral preferences outnumber exemption preferences, but they are 
used much less frequently, tend to be used by high-income taxpayers, 
and generate much less revenue. Deferral items tend to be complex; 
taxpayers generally need to recalculate income and costs using 
different schedules and keep separate books for regular tax and AMT 
purposes. Also, taxpayers may use AMT liability created by deferral 
provisions--but not by exemption provisions--as a credit against future 
years' regular tax liability in excess of the tentative AMT. The 
deferral provisions, coupled with the credit they create, are 
consistent with a policy goal of having every high-income filer pay 
some positive tax in each year, even if his or her overall multiyear 
tax liability does not change.
    The Joint Committee on Taxation (2007) estimates that the three 
largest AMT preference items in 2006 were exemption preferences that 
few would consider to be aggressive tax shelters: deductions for state 
and local taxes (59 percent); personal exemptions, including exemptions 
for dependent children (22 percent); and miscellaneous itemized 
deductions for items such as unreimbursed business expenses (11 
percent). The share of these preference items--already more than 90 
percent--will rise further over the next several years as the AMT 
encroaches on more and more middle-income taxpayers.
    After adding back their preference items and determining 
alternative minimum taxable income, taxpayers may then subtract an AMT 
exemption amount of $45,000 for couples or $33,750 for singles and 
heads of household. That exemption is limited, however, for taxpayers 
filing joint returns with AMTI over $150,000 ($112,500 for singles and 
heads of household).\3\ AMTI less any applicable exemption is taxed at 
two rates--26 percent on the first $175,000 and 28 percent on any 
excess above that amount. As under the regular income tax, capital 
gains and dividends are subject to lower tax rates. If the resulting 
``tentative AMT'' is greater than tax before credits calculated under 
the regular income tax, the difference is payable as AMT.\4\
---------------------------------------------------------------------------
    \3\ The exemption is reduced by 25 percent of the amount that AMTI 
exceeds the relevant threshold. As a result, married couples filing 
joint returns can claim no exemption if their AMTI exceeds $330,000; 
single filers and heads of household get no exemption if their AMTI is 
greater than $247,500.
    \4\ To be precise, the foreign tax credit is calculated before 
calculating the AMT and incorporated into the comparison between 
regular tax liability and AMT liability. Most credits, however, are 
calculated after both regular tax and AMT liability and do not affect 
the taxpayer's direct AMT liability.
---------------------------------------------------------------------------
    That comparison means that anything that reduces the regular income 
tax relative to the AMT or that increases the tentative AMT relative to 
the regular income tax will move taxpayers onto the AMT. For example, a 
reduction in regular income tax rates that is not matched by a 
comparable change in the AMT would make more taxpayers subject to the 
AMT. The converse is also true: increasing regular income taxes or 
cutting AMT taxes would move some taxpayers off the AMT. If the 2001 
and 2003 tax cuts are allowed to sunset after 2010 as scheduled, for 
example, fewer taxpayers will owe AMT, albeit only because their 
regular tax bills will have increased.
    The Congress has limited the AMT's reach in recent years by 
temporarily increasing the AMT exemption and allowing the use of 
personal nonrefundable credits against the AMT.\5\  For the 2006 tax 
year, for example, Congress raised the exemption from $45,000 to 
$62,550 for couples and from $33,750 to $42,500 for single filers and 
heads of household. Those changes kept 16.5 million taxpayers from 
falling into the AMT's clutches. Because those adjustments were 
temporary, the Congress will need to pass additional legislation to 
prevent a sharp rise in the number of taxpayers subject to the AMT, 
from about 4 million in 2006 to more than 23 million in 2007.
---------------------------------------------------------------------------
    \5\ Other personal credits, such as the Earned Income Tax Credit, 
were allowed against the AMT by tax law changes included in the 
Economic Growth and Tax Relief Reconciliation Act of 2001 and will 
remain in place through 2010.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Box 1 shows the calculation of AMT for a married couple having four 
children and earning $75,000 in 2007. It illustrates how the AMT will 
ensnare even middle-class families with very straightforward tax 
returns if Congress does not act.
Who is Affected by the AMT?
    Under current law, about 4 million taxpayers were affected by the 
AMT in 2006.\6\ With the expiration of the temporary AMT ``patch'' at 
the end of last year, the number of AMT taxpayers will increase 
dramatically in 2007 to 23 million, and continue to grow through 2010, 
eventually reaching 32 million, or more than one-third of all 
taxpayers. With the expiration of most of the 2001-2006 tax cuts in 
2011, the number of AMT taxpayers will fall to 18.5 million, before 
again marching steadily upward to hit 39.1 million by 2017. If the 
2001-2006 tax cuts are extended, 52.6 million taxpayers--almost half of 
all taxpayers--will pay the AMT by 2017.
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    \6\ Unless otherwise noted, estimates in this testimony are based 
on the Urban-Brookings Tax Policy Center's microsimulation model of the 
federal tax system. Taxpayers affected by the AMT include those with 
direct AMT liability, those whose credits are limited by the AMT, and 
those who choose to take itemized deductions that are lower than their 
standard deduction in order to reduce or eliminate their AMT liability. 
Our estimates differ slightly from those reported by the Joint 
Committee on Taxation (2007) because of differences in underlying 
datasets, assumptions about growth of income over time and other 
factors, and definitions of what it means to be affected by the AMT. (I 
present our estimates rather than the JCT's simply for purposes of 
internal consistency, since the JCT did not report all of the 
statistics I refer to in my testimony.) See Rohaly and Leiserson (2006) 
for further details on the Tax Policy Center's methodology.
---------------------------------------------------------------------------
    Although most AMT taxpayers are moderately well off, the tax is 
steadily encroaching on families that most would consider solidly 
middle-class. By 2010, half of all tax filers making between $75,000 
and $100,000 will pay the AMT, up from 36 percent this year and less 
than 1 percent in 2006, when the temporary AMT fix was still in place 
(table 1).\7\
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    \7\ Tax filers include all nondependent tax units filing an income 
tax return, regardless of whether they owe income tax. Taxpayers 
include all nondependent tax units with positive income tax liability 
after credits. The Joint Committee on Taxation (2007) reports estimates 
for ``taxpayers,'' which they define as all tax-filing units, including 
those that do not file tax returns and dependent returns.
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    Although the AMT may have originally been intended to prevent high-
income individuals from sheltering all of their income and paying no 
tax, it now affects more tax filers in lower income classes than it 
does at the very top of the income scale. Since the 35 percent top rate 
of the regular income tax exceeds the 28 percent top statutory rate of 
the AMT, individuals with very high incomes who do not shelter a 
substantial portion of it will end up in the regular tax system. In 
2006, only 31 percent of filers with incomes above 1 million were 
affected by the AMT, compared to 51 percent of those with incomes 
between $200,000 and $500,000. By 2010, the difference is even starker: 
only 39 percent of millionaires will pay the AMT, but 94 percent of 
those in the $200,000 to $500,000 income class will.
    What's more, many tax shelters exploit the difference in tax rates 
between long-term capital gains, which face a maximum tax rate of 15 
percent, and ordinary income, which can be taxed at rates as high as 35 
percent under the regular income tax. However, the lower capital gains 
tax rate is not considered an AMT preference item, so high-income 
taxpayers who report a large amount of capital gains receive the same 
tax break under the AMT as under the regular income tax. In contrast, 
before 1987, the lower tax rate on capital gains was considered a 
preference item and was, in fact, the largest one.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    In addition to being in certain income classes, taxpayers with any 
of several common situations are more likely than others to find 
themselves on the AMT:
    Large Families. Personal exemptions are allowed against the regular 
income tax, but not the AMT. Taxpayers with large families have many 
personal exemptions, which significantly reduce their regular income 
tax liability relative to tentative AMT. In 2006, taxpayers with three 
or more children were almost four times as likely to owe AMT as those 
with no children (table 1). By 2010, almost half of families with three 
or more children will find themselves on the AMT, compared to only 17 
percent of those without children.
    High State and Local Taxes. State and local taxes are deductible 
under the regular income tax, but not the AMT. Thus, high state and 
local taxes reduce regular tax liability relative to AMT, increasing 
the likelihood that a taxpayer will owe AMT. This helps explain why, in 
2004, taxpayers in the New York area, the District of Columbia, and 
California were most likely to owe AMT (Burman and Rosenberg 2006). 
They not only faced higher-than-average state and local tax burdens, 
but they also had higher than average incomes, making them 
substantially more likely than the average taxpayer to be subject to 
AMT. In 2006, households in high-tax states were almost three times 
more likely to be on the AMT than those in low-tax jurisdictions (table 
1). With the dramatic growth of the AMT over the rest of this decade, 
however, this differential is slated to fall dramatically. By 2010, 
residents of high-tax states will only be about 30 percent more likely 
to fall prey to the AMT than those in low-tax states (28 percent of 
households in high-tax states will face the AMT compared to 21 percent 
in low-tax states.)
    Marriage. Most married couples pay less tax under the regular 
income tax than they would if they were single. (That is, most 
``marriage penalties'' have been eliminated and many couples receive 
``marriage bonuses.'') This is not true under the AMT. AMT tax rate 
thresholds are identical for married and single taxpayers and the AMT 
exemption is only 33 percent larger for couples than for singles 
(except for those for whom the exemption has been phased out). In 
contrast, the standard deduction for couples under the regular income 
tax is twice that for singles. The combination of the AMT marriage 
penalties, the fact that married couples often have children, and the 
fact that married couples tend to have higher household incomes 
resulted in married couples being more than five times as likely to owe 
AMT as singles in 2006. In 2007, with expiration of the temporary AMT 
fix, married couples are 15 times more likely to owe AMT than singles 
(table 1).
    Taxpayer characteristics can combine to create very high 
probabilities of falling prey to the AMT. For example, absent a change 
in law, the AMT will become the de facto tax system for upper-middle-
class families with children. In 2006, less than 1 percent of married 
couples with two or more children and adjusted gross income between 
$75,000 and $100,000 were affected by the AMT, but by 2010 that share 
will rise to 89 percent (table 1).
    Other common situations that make a taxpayer more likely to incur 
the AMT include having high medical expenses or simply taking the 
standard deduction. Taxpayers may deduct medical expenses in excess of 
7.5 percent of AGI under the regular income tax, but the threshold is 
10 percent of AGI under the AMT. Thus, taxpayers with both high incomes 
and high medical expenses can be hit hard by the AMT. Even claiming the 
standard deduction can force an individual into AMT territory. Although 
most AMT taxpayers itemize deductions, the standard deduction under the 
AMT is worthless for the few who claim it: it reduces regular tax 
liability without affecting tentative AMT.
    Finally, current AMT rules allow for the possibility of some very 
perverse outcomes. Under the regular tax, filers may deduct legal fees 
incurred in cases that generate taxable damages (such as punitive 
damages or damages for nonphysical injuries) as miscellaneous itemized 
deductions to the extent that they exceed 2 percent of adjusted gross 
income. However, the AMT disallows miscellaneous deductions. As a 
result, a taxpayer with substantial legal fees will have much less 
taxable income under the regular tax than under the AMT. If the legal 
fees are high relative to the damage award, the taxpayer can actually 
owe more AMT than her net gain from a lawsuit (Johnston 2003).
    The exercise of incentive stock options generally creates income 
that is immediately taxable under the AMT, but that is not taxable 
under the regular income tax until the stock is actually sold. 
Individuals must include in AMTI the excess of the fair market value of 
the stock over the purchase price of the stock at the date of exercise 
(JCT 2006). This can cause taxpayers with very modest cash incomes to 
owe substantial AMT. If the stock is ultimately sold at a profit, the 
AMT paid earlier can be taken as a credit against the regular income 
tax owed. But if the stock price falls, the taxpayer can end up with a 
substantial AMT liability even though no income is ever realized.\8\
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    \8\ The Tax Relief and Health Care Act of 2006 allows certain 
taxpayers to claim a refundable credit for 20 percent of their unused 
long-term alternative minimum tax (AMT) credits (up to $5,000) per 
year. The refundable credit phases out for high-income taxpayers; the 
phase-out is based on the personal exemption phase-out. The refundable 
AMT credits can generally only be claimed for tax years 2007-2012 (JCT 
2006 and personal communication from Jerry Tempalski).
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Why is the AMT Becoming a ``Mass Tax''?
    Although the factors described above help explain why individual 
taxpayers are affected by the AMT, they do not explain the dramatic 
growth in the AMT. Two factors reduce regular income tax liabilities 
relative to tentative AMT over time and largely explain the explosive 
growth in AMT projected through 2010 and beyond.
    Inflation. The AMT is not adjusted for inflation whereas the 
regular income tax is. This means that if an individual's income just 
keeps pace with inflation each year, his or her regular income tax 
would remain constant (in real terms) while AMT liability would rise. 
The Joint Committee on Taxation (2007) estimates that 

the number of AMT taxpayers in 2010 would be reduced by about 88 
percent (26 million) if the exemption had been indexed for inflation 
since 1987.\9\
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    \9\ Real income growth also causes more taxpayers to become subject 
to the AMT over time because effective AMT tax rates are much higher 
than regular income tax rates for most taxpayers. (See Burman, Gale, 
and Rohaly 2005 for a discussion.) Thus, in most cases, the more income 
that is subject to AMT, the more likely it is that tentative AMT will 
exceed regular income tax. This is especially a problem for taxpayers 
in the phase-out range for the AMT exemption who are effectively taxed 
at rates 25 percent higher than the statutory AMT rate. The 26 percent 
rate becomes 32.5 percent; the 28 percent rate becomes 35 percent. This 
explains why almost all taxpayers with incomes between $200,000 and 
$500,000 are affected by the AMT (table 1). Real income growth is a 
minor factor in projected AMT growth compared to the lack of indexation 
and the impact of the tax cuts, however. Only 777,000 taxpayers would 
be subject to the AMT in 2011 if the AMT were indexed back to 1987 
levels, according to the Joint Committee on Taxation. If the tax cuts 
are extended, about five times as many people would be affected, even 
with indexation.
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    The 2001-2006 Tax Cuts. The tax cuts reduced regular income tax 
liability, but made only temporary changes to the AMT. As a result, 
regular income tax declined relative to AMT liability, dramatically 
increasing the number of taxpayers subject to the AMT. In 2007, about 
23 million taxpayers will be subject to the AMT under current law, more 
than double the 10.2 million that would have been affected had the tax 
cuts not been enacted.
Should We Care About the Dramatic Growth of the AMT?
    While many people decry the expanding reach of the AMT, others 
assert that there is no cause for concern. Some argue that the 
complexity taxpayers face in calculating their taxes twice is not a 
reason to do away with the AMT, but rather cause to eliminate the 
regular tax. Others assert that the growing prevalence of tax 
preparation software negates any problems of complexity. In fact, both 
of those arguments have significant flaws.
    Some people, observing the complexity of having two parallel 
methods of calculating taxes, argue that the best solution is to repeal 
the regular income tax. This option would have several advantages 
according to its proponents. They claim that the AMT is nearly a flat-
rate tax with only two statutory rates, 26 and 28 percent, both of 
which are significantly lower than the top statutory rate of 35 percent 
under the regular income tax. In addition, the AMT applies those lower 
rates to a broader income base, since it eliminates various special tax 
breaks that exist in the regular tax system. Since the AMT applies 
lower marginal rates to a broader tax base, it is a more efficient way 
of raising revenue than the regular tax system.
    This analysis is incorrect for several reasons.\10\ First, the AMT 
actually imposes four marginal tax rates, not two. The phase-out of the 
AMT exemption creates higher phantom tax rates of 32.5 and 35 percent, 
the latter equal to the top rate under the regular income tax.\11\ And 
in fact, significantly more taxpayers face higher effective marginal 
tax rates under the AMT than they would under the regular income tax. 
In 2006, 71 percent of AMT taxpayers faced a higher marginal rate under 
the AMT; that figure will rise to 89 percent by 2010 as the AMT 
ensnares more and more middle-income filers who would have faced 
statutory rates of 15 or 25 percent under the regular income tax 
(Leiserson and Rohaly 2006).
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    \10\ For more detailed discussion, see Burman and Weiner (2005).
    \11\ Although the AMT generally preserves the lower statutory tax 
rates on capital gains and qualified dividends that exist under the 
regular tax system, the effect is diminished by the phase-out of the 
AMT exemption. Rather than the advertised 15 percent rate, taxpayers 
with incomes in the phase-out range can face effective marginal tax 
rates as high as 22 percent on gains and dividends. See Leiserson 
(forthcoming) for details.
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    Second, as described above, some of the base broadeners in the AMT 
have questionable validity as policy. In addition, the relatively high 
AMT exemption actually means that the AMT tax base is often smaller 
than the regular income tax base because the AMT exemption is larger 
than the total of all preference items for most taxpayers. In 2006, 63 
percent of AMT taxpayers had more income subject to tax under the 
regular tax than they did under the AMT. That number will rise to 87 
percent by 2010 (Leiserson and Rohaly 2006).
    Thus the conventional wisdom that the AMT applies a lower marginal 
tax rate to a broader income base and is therefore more efficient than 
the regular tax system is incorrect. In fact, exactly the opposite is 
true. Most AMT taxpayers face a higher marginal rate applied to a more 
narrow tax base than they would if they were in the regular tax system.
    Other people assert that the complexity of calculating taxes under 
both the regular tax and the AMT does not pose a real problem. 
Relatively few taxpayers actually prepare their own tax returns, they 
argue, and instead rely on tax preparation software, which calculates 
the AMT automatically, or paid tax preparers. It is true that the AMT 
is less complex for filers who use tax preparation software or a paid 
preparer, but at the cost of the income tax system's transparency. The 
fact that the tax system is a black box for so many people is something 
to regret, not champion.
    In order to make informed decisions about work, saving, retirement, 
education, and other important matters, people should understand how 
the tax system affects those choices, but the AMT leads to endless 
confusion. Taxpayers will have a hard time predicting their marginal 
tax rate if they do not know whether they will be on the AMT. What's 
more, many people may be confused about what constitutes an AMT 
preference item. For example, Consumer Reports magazine reported in the 
February 2007 issue that the AMT is ``snagging middle-income taxpayers 
with big families, people who pay lots of state tax, and those with 
high mortgage interest.'' Mortgage interest, of course, is not an AMT 
preference item (except on home equity lines and second mortgages used 
to pay for nonhousing expenses). And needless complexity contributes to 
public perceptions that the income tax system is unfair.
    In any case, computer software has its limitations. For example, 
individuals who were on the AMT in the previous year must figure out 
the state tax deduction that would have been allowed on their prior-
year tax return before they were subject to the AMT. This is necessary 
in order to figure out how much of their state tax refund in the 
current year is taxable. This calculation is so complex that my tax 
software doesn't do it. It recommends that I go back to my prior-year 
return, and keep refiguring my state tax deduction over and over until 
the AMT gets down to zero. This is complex even with software. Without 
it, the computation would be mind-numbing.
    A second example involves the choice between itemizing and taking 
the standard deduction. Under the regular income tax, taxpayers claim 
the standard deduction as long as it exceeds the amount of itemized 
deductions. But taxpayers on the AMT should itemize even if their 
standard deduction is greater, as long as their itemized deductions 
exceed the portion of the standard deduction that makes their regular 
tax less than the AMT. Even though the AMT disallows the standard 
deduction, some taxpayers who do not owe much AMT (i.e., whose 
tentative AMT is not that much more than their tax under the regular 
system) get a partial benefit from the standard deduction. That is, 
they would not be on the AMT if they did not take the standard 
deduction. Does that sound complicated? It is. The last time I checked, 
my tax software did not deal with that issue either. Taxpayers should 
not have to figure this out for themselves.
    Is there anything positive to say about the AMT? Over the long run, 
the AMT in its current form will become a more effective revenue 
generator than the regular income tax. The AMT will raise federal 
revenues by more than $800 billion over the next ten years under 
current law and by $1.5 trillion if the 2001-2006 tax cuts are 
extended. Indeed, our estimates show that in 2007, it would cost less 
to eliminate the regular income tax than to eliminate the AMT. Over a 
longer time horizon, the Congressional Budget Office (2003) estimates 
that, primarily because of the AMT, federal taxes will claim 25 percent 
of GDP by 2050, compared with just 17 percent today. That huge influx 
of revenue could help fund growing entitlement programs such as Social 
Security and Medicare as the baby boom generation retires.
    But the AMT's power as a revenue generator stems entirely from the 
fact that its parameters are not indexed for inflation. In consequence, 
people whose incomes only just keep pace with inflation will face 
higher and higher average tax rates over time (a phenomenon sometimes 
referred to as bracket creep). And more and more people will find 
themselves in this situation as they become subject to the AMT over 
time. That is clearly not a sustainable path.
    Given this and all the other design flaws inherent in the AMT--
marriage and family penalties, higher marginal tax rates that are 
likely to discourage working and saving and encourage inefficient tax 
avoidance behavior, and needless complexity--reforming or repealing the 
AMT in conjunction with reforming the regular income tax is far 
preferable to making the AMT the basis of our tax system.
Financing AMT Reform or Repeal
    Reforming or repealing the AMT is costly and financing that cost is 
important. Outright repeal of the AMT, without any other offsetting 
changes, would reduce tax revenues by more than $800 billion through 
fiscal year 2017, assuming that the 2001-2006 tax cuts expire after 
2010. If the tax cuts are extended, the 1one-year revenue loss nearly 
doubles to almost $1.6 trillion.
    Some have argued that since everyone is aware that this AMT revenue 
should never have been collected in the first place, it is not 
necessary to offset the cost of repeal. The real baseline, they assert, 
should assume no AMT. That is a misleading argument. In fact, the AMT 
masked the true cost of the 2001 tax act. Congressional leaders 
understood that the AMT would ``take back'' a significant portion of 
the tax cuts and therefore keep their estimated cost down to the tax 
bill's advertised $1.35 trillion. By 2010, the AMT will reclaim almost 
28 percent of the individual income tax cuts, including more than 70 
percent of the cut that would have gone to taxpayers making between 
$200,000 and $500,000 (Leiserson and Rohaly 2006).
    Repeal of the AMT would be not only prohibitively expensive but 
also extremely regressive. Nearly 96 percent of the tax cut in 2007 
would go to the top fifth of income earners and 80 percent would go to 
the top tenth. More than half would go to taxpayers with incomes 
greater than $200,000.\12\ After-tax incomes of taxpayers with incomes 
between $200,000 and $500,000 would rise by 2.7 percent, or an average 
of nearly 6,000. In contrast, taxpayers in the middle quintile of the 
income distribution would receive less than 1 percent of the benefits 
and would see their after-tax income rise by an average of only $5.
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    \12\ The JCT estimates that slightly less than half of the AMT is 
paid by taxpayers with adjusted gross income (AGI) over $200,000 in 
2007. The smaller share arises because AGI is often lower than the cash 
income measure used by the Tax Policy Center. Cash income, which is 
similar to the income measure used by the Department of the Treasury in 
its distributional analysis, includes items such as contributions to 
IRAs and 401(k) plans and tax-exempt bond interest that are excluded 
from AGI.
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Reforming the AMT to Spare the Middle Class
    Rather than outright repeal, the AMT could be reformed in order to 
shield middle- and upper-middle-income taxpayers from its effects.\13\ 
The simplest reform would be to extend the exemption increase in place 
for 2006 and index the AMT for inflation. This would prevent inflation 
from increasing tentative AMT (in real terms) and conform the AMT 
treatment with that under the regular income tax.\14\ If indexation 
were applied to rate brackets and the phase-out as well as the 
exemption, only 3.6 million taxpayers would be subject to the AMT in 
2007, down from 23.4 million under current law (table 2). The number of 
AMT taxpayers with incomes less than $100,000 would fall by more than 
98 percent. By 2010, real income growth would increase the number of 
AMT taxpayers to 4.6 million, still significantly lower than the 
projected 32.4 million under current law.
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    \13\ For more information on these options, and others, see Burman 
et al. (2007).
    \14\ The AMT exemption was increased between 2005 and 2006 as an ad 
hoc inflation adjustment, but it has never been formally indexed for 
inflation. The allowance of personal non-refundable credits against 
both the regular tax and the AMT would also be extended under all 
reform options considered here.
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    A more comprehensive reform would also allow dependent exemptions, 
state and local tax deductions, the deductions for miscellaneous 
expenses and medical expenses, and the standard deduction for AMT 
purposes. This would reduce the number of AMT taxpayers to fewer than 
500,000 in 2007 and would spare virtually all taxpayers with incomes 
below $200,000 from the AMT.
    These reforms would, however, substantially reduce federal tax 
revenues. We estimate that indexing the AMT for inflation from 2006 
levels would reduce revenues by about $0.5 trillion over the ten-year 
period from 2007-2016 assuming the 2001-2006 tax cuts expire as 
scheduled. If the tax cuts are extended, the cost rises to $0.9 
trillion. The comprehensive reform package would reduce revenues by 
$0.7 trillion if the tax cuts expire and $1.2 trillion if they are 
extended.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Both options would also be regressive. Indexing the AMT for 
inflation would provide a tax cut of 1.4 percent of after-tax income to 
those in the top quintile in 2010 (table 3). It would provide an 
increase of less than one-tenth of one percent to those in the middle 
fifth of the income distribution. The broad reform package would 
increase the after-tax incomes of those in the top quintile by 1.9 
percent in 2010 while those in the top ten percent would see an 
increase of 2.1 percent. Again, those in the middle of the income 
spectrum would receive virtually nothing.
Offsetting the Revenue Cost of the Middle-Class Reforms
    The revenue cost of the reforms outlined above could be offset in a 
variety of ways. All the offset options described below are intended to 
be roughly revenue neutral over the 2007-2016 budget window, and assume 
that the 2001-2006 tax cuts expire as scheduled.\15\ If the tax cuts 
are extended, each of the options would generally lose substantial 
amounts of revenue over the budget window, and many more people would 
be subject to the AMT after 2010.
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    \15\ Tax Policy Center estimates are not revenue estimates because 
they do not account for the behavioral responses that would be 
considered by the JCT. JCT estimates, however, are not available for 
these options.
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    Although there are myriad ways in which the revenue cost of the 
reforms could be financed, I will discuss three illustrative options: 
(a) increasing the top three income tax rates under the regular tax; 
(b) increasing the AMT rates; or (c) combining (a) with disallowing the 
preferential rates on capital gains and dividends under the AMT.
    Financing the reforms by increasing AMT rates rather than by 
raising regular income tax rates leaves more individuals subject to the 
AMT, particularly those with incomes over $200,000. Since both of the 
reforms mentioned above involve substantial increases in the AMT 
exemption, they tend to shield those with incomes under $100,000 from 
the AMT. In addition, raising regular income tax rates and thus regular 
income tax liability reduces the number of people for whom tentative 
AMT is greater than regular tax and thus further reduces the number of 
AMT taxpayers. In contrast, raising AMT rates tends to increase the 
number of people for whom tentative AMT is greater than regular tax.
    Eliminating the preferential rates for capital gains and dividends 
under the AMT allows smaller increases in either regular or AMT tax 
rates. These options also tend to retarget the AMT toward those with 
very high incomes--since those taxpayers tend to have a higher share of 
their income in the form of capital gains--which is more consistent 
with the AMT's original intent. Moreover, since many tax shelters 
exploit the lower tax rate on capital gains, eliminating preferential 
gains rates would likely do more to stem tax sheltering than any of the 
existing AMT preferences.\16\
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    \16\ See Burman (1997) for a discussion of the connection between 
capital gains tax preferences and tax shelters.
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    Extending the exemption and indexing the AMT for inflation would 
require a 12 percent increase in the top three regular income tax 
rates. (We raise only the top rates because it is primarily taxpayers 
in the upper brackets who are affected by the AMT.) Under this option, 
the top rate would increase from 35 to 39.1 percent through 2010 and 
from 39.6 to 44.3 percent for 2011 and thereafter. The number of AMT 
taxpayers would fall to 2.4 million in 2007; only 100,000 of them would 
have incomes below $100,000. The change in tax burdens by income 
quintiles would be small, never more than one percent of income. The 
highest-income taxpayers, however, would pay more tax. By 2011, the top 
one percent pays additional tax equal to about three percent of income.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    If AMT rates were raised instead, to 31.1 and 33.5 percent, 9.7 
million taxpayers would be affected by the AMT in 2007; the number of 
AMT taxpayers with incomes of $200,000 and over would actually rise 
relative to current law. AMT liabilities would also increase for 
higher-income households and so they would pay higher taxes on average. 
Households in the top ten percent would experience a tax increase of 
about 1 percent of income through 2010, and those in the top one 
percent would pay additional taxes equal to more than 2 percent of 
income. After 2010, the tax increases are much smaller because the 
higher AMT exemption in combination with the pre-EGTRRA regular income 
tax rates results in fewer upper-income households owing AMT.
    If the preferential rates on capital gains and dividends were 
disallowed for AMT purposes, the required increase in the top three 
regular income tax rates would be only 2 percent. The top rate, for 
example, would need to rise from 35 to 35.8 percent through 2010 and 
from 39.6 percent to 40.4 percent thereafter. This option would reduce 
the number of AMT taxpayers by about 80 percent in 2007, to 4.5 
million. The AMT would be much more targeted at those with high 
incomes; taxpayers with incomes greater than $1 million would actually 
be more likely to owe AMT under this option than under current law. 
This option has very small effects on average tax burdens by 
quintiles--in all cases, tax changes are less than 1 percent of income. 
The tax change is much more significant for those at the very top, 
however. The top one percent would see an average tax increase of about 
4 percent of after-tax income in 2007, although the size of that tax 
increase would decline over time.
    Since broad reform of the AMT costs substantially more, financing 
it would require larger increases in either regular or AMT rates. The 
required increase in the top three regular rates would be 14 percent, 
resulting in a top rate of 39.9 percent through 2010 and 45.2 percent 
thereafter. This option reduces the number of AMT taxpayers to only 
300,000 in 2007, including only 100,000 with incomes less than 
$200,000. Since this option reduces tax revenues in the first five 
years and increases it thereafter, the largest tax increases occur 
after 2010. The average tax increase is about 3 percent of income for 
those in the top one percent after 2010.
    Financing the broad reform package would require a 38 percent 
increase in AMT rates, to 36 and 38.7 percent. As a result, 6.2 million 
taxpayers would face the AMT in 2007. Although only 100,000 taxpayers 
with incomes under $100,000 would be on the AMT, there is little 
reduction compared to current law for those making between $200,000 and 
$1 million. And virtually all taxpayers with incomes greater than $1 
million would be on the AMT.
    Finally, broad reform could be financed by disallowing the 
preferential rates on capital gains and dividends under the AMT 
combined with an increase in the top three regular income tax rates. 
The required rate increase would be 7 percent resulting in a top rate 
of 37.4 percent through 2010 and 42.3 percent thereafter. This option 
would reduce the number of AMT taxpayers by about 95 percent in 2007, 
to just 1.2 million, with only 300,000 of them having incomes less than 
$200,000. This option would have very small effects on the distribution 
of tax burdens by quintile. But disallowing the lower capital gains 
rates under the AMT, combined with the regular tax rate increases, 
results in significant tax increases for those at the very top of the 
income scale--over 3 percent of income for those in the top one percent 
before 2010.
Offsetting the Revenue Cost of Repeal
    Full repeal of the AMT could also be financed in a variety of ways. 
Obvious candidates include: (a) increasing regular income tax rates; 
(b) repealing the state and local tax deduction; and (c) repealing the 
reduced tax rates for capital gains and dividends.
    The required increase in the top three rates required to offset the 
revenue loss from repeal would be 15 percent, resulting in top rates of 
32.3, 38.1, and 40.4 percent through 2010 (from 28, 33, and 35 percent) 
and 35.8, 41.5, and 45.7 percent in 2011 and thereafter (from 31, 36, 
and 39.6 percent).\17\ This option cuts taxes in the first five years 
and increases them in the second five-years, after the 2001-2006 tax 
cuts expire. Most of the net tax increases are experienced by taxpayers 
in the top five percent of the income distribution. The top one percent 
face the largest tax increases, averaging over 3 percent of income 
after 2010. This occurs because very high income earners are most 
affected by the rate increases and do not tend to benefit as much from 
repeal of the AMT since they tend not to be on the AMT in the first 
place.
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    \17\ It would also be possible to raise rates in 2007 and keep them 
at that level permanently, rather than increasing them again in 2011 
when the tax cuts expire. In that case, the revenue-neutral rates would 
be 34.8, 41, and 43.5 percent. This option is roughly revenue neutral 
over both the first and second five-year periods of the budget window.
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    Another option to finance AMT repeal would be to broaden the tax 
base significantly by repealing the deduction for state and local 
taxes, as recommended by President Bush's tax reform advisory panel. 
The deduction is not allowed for AMT purposes. And since most taxpayers 
in the bottom 60 percent of the income distribution take the standard 
deduction, the primary beneficiaries of the deduction are those at the 
very top of the income scale who escape the AMT. More than 70 percent 
of those in the top 1 percent of the income distribution will benefit 
from the deduction in 2007, with an average tax savings of almost 
$12,000 or 1.3 percent of income. Repealing the state and local tax 
deduction raises more than enough revenue to pay for repeal of the AMT, 
although it would not if the 2001-2006 tax cuts are extended. This 
allows for income tax rates to be reduced across-the-board by 2 
percent.\18\
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    \18\ Alternatively, the bottom rates could remain the same and the 
top three rates could be reduced by 5 percent, resulting in a top 
statutory rate of 33.1 percent through 2010 and 37.5 percent 
thereafter. By 2011, this option is effectively distributionally 
neutral.
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    The option has very small effects on overall tax burdens by income 
group--amounting to less than 1 percent of income in any year. Middle-
income taxpayers receive a very small benefit from the tax rate 
reduction and are not much affected by the elimination of the deduction 
since few taxpayers itemize in that income range. Itemizers in the 
fourth quintile lose more than they gain in 2007, because most itemize, 
but many have not become affected by the AMT in that year. By 2010, 
that group overall experiences a modest tax cut. Within the top 
quintile, elimination of the AMT is more significant than the loss of 
the state and local tax deduction until 2010. After that, this income 
group loses more than they gain, but the net losses are never large, 
even within the top 1 percent. Overall, this option makes the tax 
system modestly more progressive.\19\
---------------------------------------------------------------------------
    \19\ A number of other issues arise in considering whether to 
finance AMT repeal by eliminating the state and local tax deduction. 
See Rueben (2006) for a general discussion, or Burman and Gale (2005) 
in the context of the tax reform panel's proposal.
---------------------------------------------------------------------------
    Finally, AMT reform could be financed by rolling back the 2003 
reductions in the tax rates on capital gains and qualified dividends 
combined with an 8 percent increase in the top three income tax rates 
above their pre-2001 levels, resulting in a top rate of 42.8 percent. 
This option would cut taxes by a modest amount for middle- and upper-
middle-income taxpayers. It would increase taxes significantly for 
high-income taxpayers, especially before 2011 when current law allows 
for substantial reductions in the rates on capital gains and dividends. 
Taxpayers in the top one percent of the income distribution would, on 
average, pay additional taxes equal to more than 5 percent of after-tax 
income in 2007. These households lose out for three reasons--they are 
most affected by the income tax rate increases, they have a large 
amount of capital gains and dividends, and many taxpayers in this group 
do not owe AMT (and thus receive no benefit from repeal).
    This option would increase revenues by about $100 billion in the 
first five years of the budget period and reduce revenues by the same 
amount in the second five. Beyond the budget period, it would lose 
increasing amounts of revenue.
Conclusions
    Lack of inflation indexing in the alternative minimum tax expands 
the reach of the tax each year. The 2001-2006 tax cuts have further 
exacerbated the problem by reducing regular income tax liabilities 
without corresponding permanent changes to the AMT. Caught amid these 
trends, one in three American taxpayers will soon face a tax that 
almost none of them were ever meant to pay. Although the goals of the 
AMT--ensuring high-income taxpayers pay at least some amount of tax 
each year, and reducing inefficient tax sheltering--may command public 
support, the AMT is a highly imperfect way of achieving those goals. In 
particular, under current law, the AMT will come to plague the middle- 
and upper-middle-income classes with undue complexity, a narrower tax 
base, and higher marginal tax rates than under the regular income tax.
    As the AMT expands, the political benefits of achieving a solution 
increase as well. A number of sensible reform options are available. A 
significant barrier to AMT reform is the challenge of what to do about 
the lost revenues. Official budget estimates assume that the AMT will 
provide tax revenues of nearly one trillion dollars over the next ten 
years. Even modest reforms, such as extending the AMT ``patch'' and 
indexing the AMT for inflation, would reduce tax revenues over that 
period by more than half a trillion dollars. Given our fiscal 
situation, making up that lost revenue would seem to be a necessary 
pre-condition for reform.
    I have illustrated a number of options for reforming or repealing 
the AMT without increasing the deficit over the ten-year budget period. 
The options show that it would be feasible to repeal or sharply scale 
back the AMT in a fiscally responsible manner with relatively minor 
dislocations. All of them produce winners and losers--it would be 
impossible to design a sensible revenue-neutral alternative to the AMT 
that didn't--but many would cut taxes modestly on the middle class and 
have relatively small effects on those with higher incomes.
    There are untold numbers of other fiscally responsible options 
available, and some of them might be preferable to the ones displayed 
here. For example, Ways and Means Committee Chairman Rangel has 
proposed to improve tax compliance and collections as a way to raise 
revenue. To the extent that more of the tax that is due to the IRS 
could be collected, the revenue needs to finance AMT reform would be 
reduced. As a result, the options here could be implemented with 
smaller income tax rate increases or without the use of other offsets 
such as elimination of the deduction for state and local taxes.
    The ideal solution would be to address the AMT in the context of a 
complete overhaul of the income tax, such as the proposal made by the 
President's Advisory Panel on Federal Income Tax Reform. Although the 
AMT is probably the best example of pointless complexity in the tax 
system, it is far from the only one. Addressing all of the sources of 
complexity, unfairness, and inefficiency in the tax system at the same 
time would strengthen the income tax--the major source of federal tax 
revenues--at a time when unprecedented demands are about to be placed 
on the federal government because of the impending retirement of the 
baby boomers.
    That said, the perfect should not be the enemy of the good. Many of 
the incremental options I have outlined would significantly improve our 
tax system. I applaud the subcommittee for taking the first steps 
toward advancing this goal.
    References
    Burman, Leonard E. 1997. The Labyrinth of Capital Gains Tax Policy: 
A Guide for the Perplexed. Washington, DC: Brookings Institution Press.
    Burman, Leonard E., and William G. Gale. 2005. ``A Preliminary 
Evaluation of the Tax Reform Panel's Report.'' Tax Notes (December 5): 
1349--68. http://www.taxpolicycenter.org/publications/
template.cfm?PubID=1000854.
    Burman, Leonard E., William G. Gale, Gregory Leiserson, and Jeffrey 
Rohaly. 2007. ``Options to Fix the AMT.'' Washington DC: Tax Policy 
Center. (January). http://www.taxpolicycenter.org/UploadedPDF/
411408_fix_AMT.pdf.
    Burman, Leonard E., William G. Gale, and Jeffrey Rohaly. 2005. 
``The Expanding Reach of the Individual Alternative Minimum Tax.'' 
Washington, DC: Tax Policy Center. http://www.taxpolicycenter.org/
publications/template.cfm?PubID=411194.
    Burman, Leonard E., and Carol Rosenberg. 2006. ``AMT Projections by 
State, 2004.'' Tax Notes (December 11): 1021. http://
www.taxpolicycenter.org/publications/template.cfm?PubID=1001047.
    Burman, Leonard E., and David Weiner. 2005. ``Suppose They Took the 
AM Out of the AMT?'' Tax Policy Center Discussion Paper No. 25. 
Washington, DC: Tax Policy Center. http://taxpolicycenter.org/
publications/template.cfm?PubID=9397.
    Congressional Budget Office. 2003. ``The Long Term Budget 
Outlook.'' Washington DC: The Congressional Budget Office. (December).
    Johnston, David Cay. 2003. Perfectly Legal: The Covert Campaign to 
Rig Our Tax System to Benefit the Super Rich--and Cheat Everybody Else. 
New York: Penguin.
    Joint Committee on Taxation. 2006. ``Technical Explanation of H.R. 
6408, The Tax Relief and Health Care Act of 2006, as Introduced in the 
House on December 7, 2006.'' JCX-50-06. Washington, DC: Joint Committee 
on Taxation.
    Joint Committee on Taxation. 2007. ``Present Law and Background 
Relating to the Individual Alternative Minimum Tax.'' JCX-10-07. 
Washington, DC: Joint Committee on Taxation.
    Leiserson, Greg. (forthcoming). ``The 15 Percent Rate on Capital 
Gains: A Casualty of the Alternative Minimum Tax.'' Washington DC: Tax 
Policy Center.
    Leiserson, Greg, and Jeffrey Rohaly. 2006. ``The Individual AMT: 
Historical Data and Updated Projections.'' Tax Notes (December 25): 
1167-76. http://www.taxpolicycenter.org/publications/
template.cfm?PubID=901012.
    Rueben, Kim. 2005. ``The Impact of Repealing State and Local Tax 
Deductibility.'' State Tax Notes (August 15): 497. http://
www.taxpolicycenter.org/publications/
template.cfm?PubID=1000818.

                                 

    Chairman NEAL. Thank you very much, Dr. Burman. Dr. Viard.

  STATEMENT OF ALAN VIARD, PH.D., RESIDENT SCHOLAR, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. VIARD. Chairman Neal, Ranking Member English, 
distinguished Members of the Subcommittee, it is an honor to be 
invited to discuss the AMT today.
    I would like to make four main points. First, the 
fundamental reason for the spread of the AMT is that the 
exemption amount is not indexed for inflation. The AMT spread 
rapidly before the 2001 and 2003 tax laws were adopted. It 
would have continued spreading without them, and it will spread 
further after 2010, even if those laws sunset.
    Second, recent tax legislation slowed the spread of the AMT 
in 2001 through 2006, although it will accelerate that spread 
in 2007 through 2010.
    Third, the taxpayers who move on to the AMT due to the 2001 
and 2003 tax laws still enjoy a net tax cut from those laws.
    Fourth, the spread of the AMT not only adds to complexity, 
but it also moves more taxpayers on to an ill-designed tax 
system. As the other witnesses have already stressed, the AMT 
exemption amount has never been indexed for inflation. As a 
result, inflation has always been a force that has pushed 
people onto the AMT.
    From 1987 to 2000, the AMT rolls doubled every three or 
four years. The number of people on the AMT surged from a mere 
140,000 to 1.6 million during that 13-year period.
    During 2001 to 2006, inflation caused the AMT rolls to 
increase further. During that period, the AMT rolls grew from 
1.6 million in 2000 to 3.5 million in 2006. It is sometimes 
suggested that the 2001 and 2003 tax cuts, and the other 
legislation adopted during those years, was responsible for 
this spread, but the opposite is true, for this time period.
    If pre-2001 law had remained in place, the AMT rolls would 
have surged to 8.1 million in 2006. They would have grown by a 
factor of five, rather than a factor of about two. The tax 
legislation adopted in 2001 to 2006 slowed the spread of the 
AMT. The AMT relief that was offered in those laws--part of it 
in EGTRRA and JGTRRA themselves; part of it in three other 
laws--that AMT relief was more than enough to offset the 
regular tax relief that was offered. Therefore, that 
legislation reduced the spread of the AMT during that time 
period.
    Things are different in the 2007 to 2010 period. During 
these years, the 2001 and 2003 tax laws, and the other recent 
tax legislation, are expanding AMT rolls, because those laws 
offer regular tax relief without corresponding AMT relief. 
Nevertheless, inflation continues to be a significant factor 
behind the spread of the AMT. This year, more than 10 million 
taxpayers would be on the AMT, even if the 2001 and 2003 laws 
had not been adopted.
    Let me also note that those taxpayers who move on to the 
AMT because of the 2001 and 2003 tax laws do not experience a 
net tax increase from those laws. The AMT does take back part 
of the tax cut that those laws would otherwise have offered, 
but it still leaves them with some net tax reduction.
    If the tax laws do sunset after--in 2010, the AMT will 
continue to spread rapidly, growing to a staggering 39 million 
people on the AMT in 2017. Of course, the spread of the AMT 
would be even more rapid if EGTRRA and JGTRRA were extended 
without any long-term AMT relief or solution. It is important 
that an extension of those laws include AMT relief if no 
fundamental AMT reform has yet been adopted at the time of 
extension.
    Let me say a few words about the consequences of the spread 
of the AMT. As other witnesses have mentioned, this is a source 
of complexity for millions of ordinary taxpayers, some who 
merely have large families, live in high-tax States, or are in 
a particular income range.
    A bigger defect is that the spread of the AMT also puts a 
larger number of taxpayers on to an ill-designed tax system. I 
want to echo the criticisms that Len has just made of the AMT 
as an alternative tax system.
    The notion that it is a low-rate, flat-rate, broad-based 
income tax that might be better than a regular income tax is 
fundamentally mistaken. The base broadening provisions are 
limited, they are highly selective, and many of them are 
misdirected.
    Furthermore, effective marginal tax rates under the AMT are 
not systematically lower than those under the regular income 
tax. As Len has already mentioned to you, it is not the case 
that the AMT just has tax rates of 26 and 28 percent. Tax rates 
of 32.5 and 35 percent also exist.
    In summary, Mr. Chairman, the fundamental reason for the 
spread of the AMT is the failure to index for inflation. Recent 
tax legislation slowed the AMT spread in 2001 through 2006, 
although it will accelerate it in 2007 through 2010. The AMT 
needs to be corrected, not only because of the complexity that 
it causes, but because it is exposing more taxpayers to an ill-
designed tax system. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Viard follows:]
 Statement of Alan Viard, Ph.D, Resident Scholar, American Enterprise 
                               Institute
    Chairman Neal, Ranking Member English, Members of the Committee; it 
is an honor to appear before you today to discuss the alternative 
minimum tax (AMT).
    I would like to make four main points:

      The fundamental reason for the spread of the AMT is that 
the exemption amount has never been indexed to inflation. As a result, 
the AMT spread rapidly before the 2001 and 2003 tax laws were adopted, 
it would have continued spreading without those laws, and it is 
projected to spread further after 2010 even if those laws sunset.
      The 2001 and 2003 tax laws, in combination with other tax 
legislation adopted in 2001 through 2006, slowed the AMT spread in 
those years, but will accelerate the spread in 2007 through 2010.
      Taxpayers who move onto the AMT in 2007 through 2010 due 
to the 2001 and 2003 tax laws still enjoy a net tax cut from those 
laws.
      The spread of the AMT exposes more taxpayers to an ill-
designed tax system.

AMT Exemption Amount Has Never Been Indexed for Inflation
    The basic design of the AMT has remained largely unchanged since 
1987, when the provisions of the Tax Reform Act of 1986 (enacted 
October 22, 1986) took effect. At that time, the exemption amount was 
$40,000 ($30,000 for unmarried taxpayers). No automatic inflation 
adjustment was provided for the AMT exemption, even though the regular 
tax brackets and exemption amounts were and are adjusted for inflation.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Since that time, there has been only one permanent increase in the 
exemption amount. The Omnibus Budget Reconciliation Act of 1993 
(OBRA93) (enacted August 10, 1993) increased the exemption amount to 
$45,000 ($33,750 for unmarried taxpayers), effective in 1993. As can be 
seen in Figure 1, the increase fell far short of the amount needed to 
offset the cumulative effects of inflation since 1987.
    Moreover, OBRA93 also failed to provide for inflation indexation. 
By 2000, therefore, the exemption amount had fallen further behind what 
was needed to keep up with inflation.
Inflation Caused AMT to Spread Before 2001
    When the regular tax system is indexed for inflation and the AMT is 
not, the effects of inflation are straightforward. Tax liability 
computed under AMT rules rises more rapidly than tax liability computed 
under regular tax rules. A larger number of people therefore find that 
their AMT-computed tax liability is the larger of the two and they then 
move onto the AMT.
    As one would expect, the AMT spread relentlessly during the 13 
years after 1987, as shown by the Brookings-Urban Tax Policy Center 
data displayed in Figure 2. The AMT rolls surged from a mere 140,000 in 
1987 to 1.6 million in 2000. Throughout this period, the number of AMT 
taxpayers typically doubled every three or four years.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Inflation Caused Further AMT Spread in 2001-2006; Tax Legislation 
        Slowed the Spread
    The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) 
(enacted June 7, 2001) provided sweeping reductions in regular income 
tax rates in 2001 through 2010. The Jobs and Growth Tax Relief 
Reconciliation Act (JGTRRA) (enacted May 28, 2003) provided further 
reductions in regular tax liability.
    A common criticism asserts that these laws accelerated the spread 
of the AMT by lowering regular tax rates without providing AMT relief. 
As taxpayers' regular tax liabilities declined with no change in their 
AMT liabilities, the story goes, taxpayers moved onto the AMT.
    That story does not accurately describe what happened in 2001 
through 2006. EGTRRA and JGTRRA actually provided some AMT relief, and 
other laws signed by President Bush during this period provided 
additional relief. The net consequence of these laws was to slow the 
spread of the AMT in 2001 through 2006, relative to what would have 
happened under pre-2001 law.
    EGTRRA increased the AMT exemption amount to $49,000 ($35,750 for 
unmarried taxpayers) for 2001 through 2004.\1\ The higher exemption 
amounts duly took effect for 2001 and 2002. Subsequently, JGTRRA 
increased the exemption amount still further to $58,000 ($40,250 for 
unmarried taxpayers) for 2003 and 2004.
---------------------------------------------------------------------------
    \1\ EGTRRA also made the child credit and the earned income tax 
credit allowable under the AMT through 2010.
---------------------------------------------------------------------------
    Three other laws also provided AMT relief during this time period:

      The Job Creation and Worker Assistance Act (enacted March 
9, 2002) allowed personal nonrefundable credits to be claimed against 
the AMT in 2002 and 2003 (prior law allowed such credits only through 
2001).
      The Working Families Tax Relief Act (enacted October 4, 
2004) extended the 58,000 exemption amount for 2005. It also allowed 
personal nonrefundable credits to be claimed against the AMT in 2004 
and 2005.
      The Tax Increase Prevention and Reconciliation Act 
(enacted May 17, 2006) raised the exemption amount to $62,550 ($42,500 
for unmarried taxpayers) for 2006 and also allowed personal 
nonrefundable credits to be claimed against the AMT in that year.

    According to Brookings-Urban Tax Policy Center data, the net effect 
of the legislation adopted in 2001 through 2006 was to reduce AMT 
coverage in those years. This reduction can be seen in the first part 
of Figure 3, the portion to the left of the first dashed horizontal 
line.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    If the tax code had simply been left alone after 2000, the AMT 
rolls would have surged from 1.6 million in 2000 to 8.1 million in 
2006. The surge would have occurred for the same reasons as the growth 
in the previous 13 years; inflation would have increased AMT 
liabilities relative to regular tax liabilities. The legislation 
adopted during this period slowed the spread of the AMT; the actual AMT 
rolls were smaller in each year than they would have been under prior 
law. Due to this legislation, there were 3.5 million taxpayers on the 
AMT in 2006, rather than 8.1 million.
    The AMT relief adopted during this period, some of it provided in 
EGTRRA and JGTRRA and some added by the other three laws, was 
sufficiently generous that it had the net effect of moving taxpayers 
off of the AMT. (Because the legislation increased AMT revenue per AMT 
taxpayer, AMT revenue was roughly unchanged from the level that would 
have resulted from prior law.) These laws slowed the AMT spread that 
would otherwise have resulted from inflation.
Inflation Is Causing a Further Spread in 2007-2010, Reinforced by the 
        Effects of the Tax Cuts
    The story in which EGTRRA and JGTRRA move taxpayers onto the AMT 
does have some validity for 2007 through 2010. This can be seen from 
the middle part of Figure 3, the portion between the two dashed 
horizontal lines. With the recent tax legislation in place, the AMT 
rolls number 23.4 million in 2007, rising to 32.4 million in 2010. The 
spread would have been slower without the legislation; under pre-2001 
law, the AMT rolls would have been 10.2 million in 2007, rising to 16.5 
million in 2010.
    The numbers also reveal, though, that a rapid inflation-driven 
spread was already programmed into the AMT, again due to its lack of 
indexation. Even if EGTRRA and JGTRRA had never been adopted, we would 
still be confronting an unacceptable spread of the AMT. We would be 
discussing a tax system that reached over 10 million people today, up 
from less than 1 million a decade earlier. The problem clearly involves 
more than the effects of those laws.
    Still, it is true that the AMT spread is more rapid with EGTRRA and 
JGTRRA than it otherwise would have been. These laws provide 
substantial regular tax relief for 2007 through 2010, without providing 
accompanying AMT relief.
Taxpayers Who Move onto the AMT Still Have a Net Tax Cut
    As discussed above, some taxpayers who would otherwise be on the 
regular tax are on the AMT in 2007 through 2010 due to EGTRRA and 
JGTRRA. It is important to understand how these taxpayers' tax 
liabilities are affected. Some observers claim that EGTRRA and JGTRRA 
constitute a ``tax increase'' for these taxpayers. In reality, however, 
these taxpayers still enjoy net tax cuts from those laws.
    Consider an example. Suppose that, without EGTRRA and JGTRRA, a 
hypothetical taxpayer would have a $100 tax liability under regular tax 
rules and a $90 tax liability under AMT rules. The taxpayer would then 
be on the regular income tax and would have a $100 tax liability. 
Suppose that those laws reduce the taxpayer's liability under regular 
tax rules to $85 while leaving his or her liability under AMT rules 
unchanged at $90. Because liability under the AMT rules is now higher 
than the liability under the regular tax rules, the taxpayer moves onto 
the AMT and has a $90 tax liability.
    Although these laws cause the taxpayer to move onto the AMT, they 
do not raise his or her tax liability, relative to prior law. On the 
contrary, the laws reduce the taxpayer's liability from $100 to $90. 
Moving onto the AMT merely reduces the size of the tax cut, which would 
have been $15 without the AMT, to $10. In colloquial terms, the AMT 
``takes back'' one-third of this taxpayer's tax cut.
    It is correct, therefore, to speak of the AMT taking back part of 
the tax cuts, but it is not correct to speak of the AMT turning the tax 
cuts into tax increases. The only taxpayers who do not receive any tax 
savings from the regular-tax-rate reductions in EGTRRA and JGTRRA are 
those who would already have been on the AMT, even without these 
laws.\2\
---------------------------------------------------------------------------
    \2\ Even those taxpayers may enjoy tax savings from other 
provisions of EGTRRA and JGTRRA. To begin, EGTRRA provides some AMT 
relief that applies in 2007-2010, as mentioned in footnote 1, above. 
Also, many of the tax-reduction provisions in EGTRRA and JGTRRA apply 
under both the AMT and the regular tax, including the rate reductions 
for dividends and long-term capital gains and the expansion of tax-free 
savings accounts.
---------------------------------------------------------------------------
Inflation Will Cause AMT to Spread Still Further after 2010, Even if 
        the Tax Cuts Sunset
    Due to inflation, the AMT is projected to continue spreading after 
2010. The AMT rolls during this period are shown in the third part of 
Figure 3, the portion to the right of the second dashed horizontal 
line. The rolls grow from 32.4 million in 2010 to 39.1 million in 2017.
    As noted above, EGTRRA and JGTRRA expand the AMT rolls to some 
extent in 2007 through 2010 and their sunset therefore provides a 
respite from the spread of the AMT. But, the respite is short-lived, as 
inflation resumes its steady toll. The AMT spreads to absolutely 
unacceptable levels, even without EGTRRA and JGTRRA. Because those laws 
are scheduled to sunset, the AMT rolls under current law are 
essentially identical to those under pre-2001 law after 2010.
    Of course, the AMT spread would be even more rapid if EGTRRA and 
JGTRA were extended without any long-term AMT relief or solution. An 
extension of these laws would need to include AMT relief, if no 
fundamental AMT solution had yet been adopted.
The Spread of the AMT Puts More Taxpayers on an Ill-Designed Tax System
    Without relief, the AMT will spread to a wide range of taxpayers. 
Those most likely to be hit by the AMT include the following:

      Taxpayers with large families are more likely to owe AMT, 
because the AMT disallows the personal exemption ($3,400 per person in 
2007) that the regular income tax allows for the taxpayer, spouse, and 
dependents. Under current law, in 2007, almost 40 percent of taxpayers 
with three or more children will owe AMT, compared to 11 percent of 
taxpayers without children.\3\
---------------------------------------------------------------------------
    \3\ All of the data on 2007 AMT coverage are Urban-Brookings Tax 
Policy Center data, taken from Greg Leiserson and Jeffrey Rohaly, ``The 
Individual AMT: Historical Data and Updated Projections,'' Tax Notes, 
December 25, 2006.
---------------------------------------------------------------------------
      Taxpayers who live in high-tax states are more likely to 
owe AMT, because the AMT disallows the regular tax system's itemized 
deduction for state and local income (or sales) and property taxes. 
Under current law, in 2007, 22 percent of taxpayers in high-tax states 
are on the AMT, compared to 15 percent in low-tax states.
      Taxpayers with incomes in the ranges in which the AMT 
rate schedule is closest to the regular tax schedule are most likely to 
be on the AMT. Under current law, in 2007, 90 percent of taxpayers with 
cash incomes between $200,000 and $500,000 (in 2006 prices) are on the 
AMT, compared to 34 percent of those with incomes above $1,000,000 and 
36 percent of those with incomes of $75,000 to $100,000.

    As these taxpayers move onto the AMT, they will experience a 
significant increase in complexity. It should be recognized, however, 
that they will also be moving onto an ill-designed tax system.
    Some have argued that the AMT is a low-rate flat-rate broad-based 
income tax that would actually be a good replacement for the income 
tax. As I argued in the November 2006 AEI Tax Policy Outlook, that view 
is unconvincing.\4\
---------------------------------------------------------------------------
    \4\ Alan D. Viard, ``The Alternative Minimum Tax: A Better 
System?'' AEI Tax Policy Outlook, November 2006, www.aei.org/
publication25110.
---------------------------------------------------------------------------
    The AMT's base-broadening provisions are limited and highly 
selective, hampering any gains in economic efficiency. In some cases, 
the AMT is likely to induce taxpayers to shift from one tax-preferred 
activity to another tax-preferred activity (that the AMT does not 
address), with little or no gain in economic efficiency. Also, some of 
the base-broadening provisions are misdirected, because they deny 
people the ability to deduct costs of earning income. The AMT also 
features harsh treatment of some workers who exercise incentive stock 
options and some winners of taxable damage awards.
    The redeeming feature of the AMT is supposed to be its low marginal 
rates, but that, too, do not stand up under scrutiny. Effective 
marginal tax rates under the AMT are not systematically lower than 
those under the regular income tax. A common misconception holds that 
the AMT has two brackets, 26 percent and 28 percent. In reality, 
however, the AMT features two other, higher-rate, brackets. The 
marginal rates are 32.5 and 35 percent in the interval in which the 
exemption amount is being phased out. Also, the effective tax rate on 
an additional dollar of wages is enhanced under the AMT because a 
smaller portion of that dollar is deductible from taxable income, since 
the AMT allows a narrower range of itemized deductions.
    Figure 4 provides illustrative calculations of the difference in 
effective marginal tax rates between the two systems, for different 
types of returns and at different income levels, under a specific set 
of simplifying assumptions. It can be seen that the AMT rate is 
sometimes higher and sometimes lower than the regular tax rate. 
Although this calculation is only for a stylized example, it indicates 
that there is no inherent tendency for the AMT to have lower marginal 
tax rates.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

Summary
    The fundamental reason for the spread of the AMT is that the 
exemption amount has never been indexed to inflation. As a result, the 
AMT spread rapidly before the 2001 and 2003 tax laws were adopted, it 
would have continued spreading without those laws, and it is projected 
to spread further after 2010 even if those laws sunset.
    The 2001 and 2003 tax laws, in combination with other tax 
legislation, slowed the AMT spread in 2001 through 2006, but will 
accelerate the spread in 2007 through 2010. It should be recognized 
that taxpayers who move onto the AMT due to the 2001 and 2003 tax laws 
still enjoy a net tax cut from those laws.
    The spread of the AMT not only causes complexity, but also exposes 
more taxpayers to an ill-designed tax system.

                                 

    Chairman NEAL. Thank you very much, Doctor. Mr. Solomon, 
prior Treasury testimony stated that, ``Nearly all the AMT 
taxpayers will lose some part of the benefit of the 2001 
through 2004 tax cuts, including some who will lose all of the 
benefit.''
    CRS estimates this ``take-back'' effect of AMT peaks for 
those earning $100,000 to $150,000, who will lose two-thirds of 
the promised tax cut. Can you explain why the Administration 
continues to push for permanent 2001 and 2003 tax cuts without 
any permanent AMT solution? It seems that this income group 
will really be paying for everyone else's tax cut.
    Mr. SOLOMON. Thank you, Mr. Chairman. In response to your 
question, there are two parts. First, the 2001 and 2003 tax 
relief provided benefits for virtually all Americans.
    Second, with respect to your question of why the 
Administration urges that the tax relief be made permanent, the 
reason for that is because the tax relief has been very 
important for the economy. It has helped make the economy 
strong. The economy is strong, and we need to keep it strong.
    For purposes of planning, it is important for taxpayers to 
know that, looking forward, they are going to have stable tax 
rates. For this reason, the Administration thinks it's 
important that the tax relief be made permanent.
    With respect to the AMT, the Administration has proposed a 
one-year patch. We recognize that the AMT is a very important 
problem, and we look forward to working with this Committee and 
the Congress in finding a long-term solution for the AMT.
    Chairman NEAL. Do you remember Bondo?
    Mr. SOLOMON. Excuse me?
    Chairman NEAL. Do you remember Bondo, how it was used for 
repairing automobile work?
    Mr. SOLOMON. No, I'm sorry, I do not, Mr. Chairman.
    Chairman NEAL. Well, I guess the question I would raise 
with you, would you agree at least with the premise that I 
offered, that there is a clawback provision that did, for 
people in the income groups that I described, they did lose a 
substantial part of the tax cuts of 2001 through 2003?
    Mr. SOLOMON. I would phrase it that virtually all Americans 
have enjoyed the tax cuts.
    Chairman NEAL. Okay.
    Mr. SOLOMON. There has been some clawback.
    Chairman NEAL. Okay.
    Mr. SOLOMON, but virtually all Americans have enjoyed the 
tax relief.
    Chairman NEAL. Okay, thank you. Dr. Burman, we have heard 
some testimony today about inflation, as Dr. Viard said, being 
the fundamental reason for the spread of AMT. Do you agree? If 
not, what other reasons would you point to as contributing 
factors?
    Mr. BURMAN. It is certainly true that inflation is a factor 
in the spread of the AMT. It was never indexed for inflation. 
When the regular income tax was indexed in 1982, the AMT was 
left unadjusted.
    As I noted in my testimony, the number of people on the AMT 
would have grown to 16 million by 2010, even without the tax 
cuts. That is why I think you have been so engaged in the issue 
for such a long time, and why, frankly, it has agitated me, as 
well.
    The tax cuts doubled the size of the problem. Without the 
2001 to 2003 tax cuts, the number of people on the AMT would be 
about half of what it is in 2007. Now, we have patched it every 
year. Congress has kept the damage from being too great, but 
the cost of that patch grows every year. If the tax cuts are 
allowed to expire at the end of 2010, the number of people on 
the AMT actually drops by nearly half.
    The other thing is that real income growth pushes more 
people on to the AMT, but that is a relatively small factor. If 
it had been indexed for inflation and if there had been no tax 
cuts, the number of people on the AMT would be in the of 
hundreds of thousands, rather than millions, or tens of 
millions.
    Chairman NEAL. Ms. Olson, during your testimony you 
criticize the AMT, as you have faithfully done, incidentally, 
during your previous appearances. You suggested that ``it 
alters the distribution of the tax burden, and it neutralized 
the effects of changes to tax rates in the regular system.'' 
Could you briefly explain that?
    Ms. OLSON. Well, one point that I have tried to make is 
that the AMT has so infected our entire tax system, that not 
only is there some clawback effect, as others have talked 
about, but if Congress has made a determination that the 
standard deduction and the personal exemptions reflect the 
basic expenses that taxpayers need to have before they're 
taxed, and yet the AMT is adding that back in, and people are 
being brought into the system solely because of dependency 
exemptions--as 19 percent of the income is attributable to that 
now--that's a serious problem.
    I would make the point that whether you look at tax rates, 
or you just look at policy calls, if you were to decide to 
increase the standard deduction, or increase the personal 
exemptions, because you think it's not keeping up with cost of 
living allowances, you would be bringing more people into the 
AMT. When you have that kind of situation, it has affected our 
entire tax system.
    Chairman NEAL. Thank you. Mr. English.
    Mr. ENGLISH. Thank you, Mr. Chairman. This is very 
stimulating testimony. I note that the claim is being made that 
the 2001 and 2003 tax cuts, in effect, forced many Americans to 
pay the AMT. I am wondering if the panelists could give us a 
sense of how many taxpayers are paying more tax, both regular 
and AMT, as a result of the Bush tax relief, than they would if 
these measures had not been enacted. Mr. Solomon, could you 
give us some insight on that?
    Mr. SOLOMON. Certainly, Congressman. In fact, there are no 
taxpayers who are paying more tax.
    Mr. ENGLISH. None at all?
    Mr. SOLOMON. No taxpayers paying more tax. Now, there may 
be perhaps an aberration in some situation, but as a result of 
the tax relief--and, the tax relief is, in fact, that, tax 
relief--it does not result in more taxpayers paying tax.
    There may be more taxpayers who are on the AMT, but that's 
not the total consideration. The total consideration is the 
total tax liability measured under both the regular tax and the 
AMT. Taking both of those into account, and not just focusing 
on AMT, the tax relief was just that--tax relief.
    Mr. ENGLISH. Isn't it also true that if the Bush tax cuts 
were allowed to expire, the number of people paying the AMT 
will, after a drop around 2011, continue to rise quickly and 
then soon surpass current levels?
    Mr. SOLOMON. That's correct. It goes to the basic structure 
of the AMT. The real issue is the AMT itself, the structure of 
the AMT itself, the fact that it has amounts that are not 
indexed for inflation, the fact that it denies various 
deductions, the fact that it denies the personal exemption. The 
real issue lies in the structure of the AMT itself.
    So, even if the tax relief was to expire, nevertheless, the 
basic circumstances that caused the expansion of the AMT would 
continue to exist, and the number of AMT taxpayers would 
continue to increase.
    Mr. ENGLISH. Ms. Olson, I am struck by one element of your 
testimony, and that is the argument, ``We recognize that the 
AMT was put in place as a solution to what were perceived as 
abusive tax shelters, but since the AMT was conceived, there 
has been a significant change in the character of the tax 
code.''
    Are you making the argument that the rationale for the AMT, 
those features of the tax code that could be so dramatically 
gained, have been rolled back or, if not, eliminated by past 
legislative action? In fact, if we repealed the AMT, would we 
be creating a return to the 1969 situation? Or, has most of 
that problem been addressed elsewhere?
    Ms. OLSON. I wouldn't say that these problems have so much 
as been eliminated as they have been replaced by new tax 
avoidance techniques. Those tax avoidance techniques are not 
necessarily things that show up on the face of the return that 
you could easily add back as tax preferences--offshore havens, 
things like that--they don't show up on the return.
    So, whereas you do have people sheltering income, they are 
not going to be affected by the AMT. I think both Treasury and 
the Tax Policy Institute have figures to show the number of 
taxpayers that make over $1 million that paid 0 tax. The AMT 
isn't doing what it originally was intended to do, in terms of 
bringing people back into the system, and it is harming people 
that it never intended to touch.
    Mr. ENGLISH. So, it's fair to say that there are tax 
avoidance problems now, but most of them are problems of a sort 
that the AMT doesn't directly speak to, but instead, it creates 
its own problems, particularly in the area of complexity?
    Ms. OLSON. I think that's correct.
    Mr. ENGLISH. What impact has the AMT had on savings 
vehicles and the predictability of some of the policies that we 
have put in place in the code to increase economic growth?
    Ms. OLSON. I am not sure that I am qualified to----
    Mr. ENGLISH. Would any of the panelists like to speak to 
that? Dr. Burman?
    Mr. BURMAN. I was actually thinking about that the other 
day, because we had something from our personnel office saying, 
``You should put your money in a Roth 403(b).'' Actually, if 
you do that, and your income is at a certain level, it could 
put you into the phase-out range for the AMT. Effectively, you 
would be subject to a big tax penalty on the additional income 
you realize.
    A Roth is a good deal if you expect your tax rate when you 
retire to be about what it is now or higher. For people who are 
pushed onto the AMT by their additional contributions, it could 
be a bad deal.
    The big problem is that it makes it hard even for people to 
understand how the tax system is going to affect them. That's a 
problem, not just for savings incentives, but for charitable 
contributions. There was an article in Consumer Reports this 
week that said, ``Watch out. Your mortgage interest deduction 
is going to be taken back by the AMT.'' It's not true, but 
people are just really confused by this.
    Mr. ENGLISH. That changes the incentives. Thank you very 
much, Mr. Chairman.
    Chairman NEAL. Thank you, Mr. English. Mr. McDermott will 
inquire.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. I appreciate your 
having us have an opportunity to finally discuss this issue. 
For the last six years it has been sort of off base to even 
bring it up, except to have a minor fix each year.
    If I understand it correctly from this first chart that we 
have--it's called, ``The Present Law and Background Related to 
Individual Alternate Minimum Tax''; I don't know whether you 
folks got that--but the first graph in there has a drop. If the 
Bush tax cuts are not extended, you have a drop from $120 
billion down to something like $40 billion, and it goes down 
from 30 million taxpayers to 18 million.
    It seems to me that there were no changes in the AMT tax 
rates when they made the tax rate cuts in the other tax system. 
Is that a fair description, Mr. Burman, if what has gone on?
    Mr. BURMAN. Yes, that's true.
    Mr. MCDERMOTT. It--the solution that's being offered--I 
don't know, I can't tell what you really think is the solution 
to this--but isn't the solution going back into those tax cuts 
of Mr. Bush of 2001 and 2003 and making some adjustments, and 
making some adjustments in the AMT tax rates?
    Mr. BURMAN. There are actually a variety of solutions. You 
could roll back the Bush tax cuts, and that would make it 
easier to fix the AMT. It would raise some revenue that would 
offset some of the cost of repealing or reforming the AMT. You 
could just adjust income tax rates by themselves, as part of 
the current structure, or you could do other things to raise 
the revenue.
    Mr. MCDERMOTT. But it sounds to me--and I have been here 
since 1989, and I heard there was a problem with Social 
Security, and I heard there was a problem with Social Security, 
and every year we hear there is a problem with Social Security. 
Congress has sat on its hands as we knew this bulge was coming 
of people to get on the Social Security system in 2010. It was 
almost as though they were trying to create a crisis to make it 
necessary to say, ``Oh, we can't fund it, let's go to 
privatization.''
    I have the same feeling about this tax thing, that it was 
left alone to create a crisis that would get us in to do 
something to get rid of the income tax, or--I don't know what 
they're up to. Tell me. Am I misperceiving Congress sitting on 
its hands for the last 12 years, knowing this was getting 
worse?
    Mr. BURMAN. I----
    Mr. MCDERMOTT. For the last six years, making it worse by 
enacting tax cuts?
    Mr. BURMAN. I'm not sure I want to comment on the motives, 
but it's certainly been true that the problem hasn't been 
fixed.
    The biggest problem is that it's hard coming up with the 
revenue that you were pretending was going to come in from the 
AMT, and repealing it would cost $70 billion, according to the 
JCT.
    Mr. MCDERMOTT. How about in 2001, how much would it have 
been?
    Mr. BURMAN. I don't have that estimate right in front of 
me. The 2001 tax cuts about doubled the cost of fixing the AMT.
    Mr. MCDERMOTT. So--and now it's three times? Four times?
    Mr. BURMAN. Well, the estimate that's in my testimony is 
that if the tax cuts are extended, the cost of repealing the 
AMT would be about $1.6 trillion over ten years, rather than 
the $870 billion that was estimated, and that the cost would be 
growing over time.
    Mr. MCDERMOTT. So, is it--suppose we don't do anything? 
What happens?
    Mr. BURMAN. Well----
    Mr. MCDERMOTT. Is it just going to be screaming from the 
public that's going to change this?
    Mr. BURMAN. Well, if you don't do anything, 23 million 
people will be subject to the AMT, including more than a third 
of people with incomes between $75,000 and $100,000.
    Mr. MCDERMOTT. So, you would have to think that the 
Republicans were setting up 33 million to scream about changing 
the tax structure?
    Mr. BURMAN. I leave it to you to figure out the motives.
    Mr. MCDERMOTT. Well, if you can explain some economic 
motive why they did it, I would be willing to listen to that. 
Can you think of any economic reason?
    Mr. BURMAN. I think it's more like eating food you know you 
shouldn't be eating. You know it's not good for you, but you 
can't stop. We need the revenue, or we need to pretend the 
revenue is coming in. When the President says, ``The budget is 
going to be balanced in 2012,'' he is counting on a lot of AMT 
revenue.
    Mr. MCDERMOTT, but that line--they knew what that line was 
going to look like. They knew if they didn't fix it there--if 
you go to a doctor, and he says, ``If you don't stop eating 
sugar, you're going to get diabetes,'' and you keep eating 
sugar, and get diabetes, what would you say about such a 
patient?
    Mr. BURMAN. [No response.]
    Mr. MCDERMOTT. Irresponsible. Never mind. Thank you very 
much.
    Chairman NEAL. I thank the gentleman. The gentleman from 
Oregon, Mr. Blumenauer, will inquire.
    Mr. BLUMENAUER. Thank you very much, Mr. Chairman, and I do 
appreciate your single-minded focus on this issue. It has been 
my number one tax issue since I joined Congress and had an 
opportunity to try, in a small way, to reinforce your strong 
voice on this. That's why I wanted to be on this Subcommittee.
    I want to pick up, if I could, on some of the line of 
inquiry from Mr. McDermott, because this is a millionaire's tax 
that has morphed into a lawyers and accountants and lobbyist 
tax, which is now being a tax on working two-income families 
with children.
    Mr. Burman, I believe you mentioned that in 2001 the tax 
changes that were made doubled the cost of the fix, but in 
2001, we had endless surpluses. We were concerned about paying 
off the Federal debt--those were the days, ``What are we going 
to do when there are no taxable debt instruments in the United 
States?''
    A conscious decision was made to ignore this, and instead, 
incrementally tinker with the tax system, making some very 
substantial benefits, transferring very substantial benefits, 
to a very relatively small group of people, concentrated, 
scatter some other things, making a hash out of our tax policy, 
and kicking the can down the road on the AMT.
    It would have been a--and I would like, Mr. Chairman, for 
us to have provided to the Committee exactly what would have 
happened, in terms of the surplus that was projected in 2001, 
and instead of rounds of tax cuts for those who needed it the 
least, if we would have solved this problem that you have shown 
this searchlight on. I think that would be very interesting for 
the Committee to have.
    My question and my concern is serving on the Budget 
Committee, I see that although this continues not to be a 
priority for the Administration. They have assumed the $50 
million patch, but then they spend all this AMT on their 
budget, and they want to extend other tax cuts over the 5-year 
and 10-year horizon, instead of fixing this problem.
    So, I would like to start, Mr. Solomon, to understand. It 
appears that this is not a priority of the Administration. They 
didn't deal with it when they could have, relatively easily in 
2001, and they were concerned about the Federal Government 
having too much money, and they have watched as this has 
morphed into a tax on the middle class with families.
    It doesn't hit the hedge fund manager. It hits the 
lobbyists, the accountants, and now it's hitting postal workers 
and fire fighters and teachers. I don't understand why this 
isn't a priority of the Administration, the same way of 
extending the tax cuts and spending all of this money in their 
budget plan.
    Mr. SOLOMON. This is a priority for the Administration. 
This is a very important issue. In the budget, the 
Administration proposed a one-year patch to deal with this very 
difficult and important issue. We care, just like you do, about 
the effect that the AMT is having, and will have, on middle-
income taxpayers.
    Just to note, with respect to 2001, the issue of the AMT 
was raised during the 2001 considerations, and a patch was 
included as part of the tax relief. In addition, a patch was 
included in 2003.
    Mr. BLUMENAUER. Yes. I understand the patch, the little--
that's the Get Out of Jail Free card, that's the minimum that 
you can do to get away with it. If they didn't do the patch, 
the whole house of cards would have collapsed. If it is a 
priority, why does the Bush budget that we're dealing with in 
the Budget Committee right now--Mr. Doggett and I are sort of 
scratching our heads--why do you propose to spend all the money 
that the AMT is going to collect, if it is a priority to fix 
it?
    Mr. SOLOMON. It is a priority to fix it, and we look 
forward to working with you to find solutions for the AMT 
problem.
    Mr. BLUMENAUER. Let me try one last time. If it is a 
priority of the Bush Administration to fix it, having dodged 
the bullet and not done it earlier, why does the budget that 
you have given us assume that we are going to spend all the 
money it raises, except for a one-year patch? That doesn't 
sound like it is a priority, does it?
    Mr. SOLOMON. It is a priority to deal with this very 
difficult and important issue. There are many facets of this, 
and many complexities to it, and we look forward to working 
with you to try to find a solution to it.
    Mr. BLUMENAUER. Mr. Chairman, I would like, with the help 
of the Committee Chair and Ranking Member, to--and maybe it's--
maybe this is all Mr. Solomon is authorized to say, that he 
wants to work with us, and it's a priority--but I would like to 
sort of see if we can get a response from the Administration as 
to whether or not it's a priority. If it is a priority, why are 
they proposing to spend all the money that it will raise, other 
than the one-year patch?
    Mr. ENGLISH. Will the gentleman yield?
    Mr. BLUMENAUER. I would be happy to.
    Mr. ENGLISH. I am not sure I understand what the gentleman 
is now asking of the Administration. I think they have been 
very forthcoming and very direct. Certainly they have dealt 
with this as directly and as completely as any Administration 
recently has.
    I really have to wonder what it is exactly you want Mr. 
Solomon to give you that he hasn't already given you.
    Mr. BLUMENAUER. Reclaiming my time, Mr. English, I--what I 
am trying to say is we have had an orgy of tax cuts that has 
been produced by this Administration and the previous six years 
in Congress.
    I guess I assume that the issue of a priority is what you 
spend money on. The only money that this Administration is 
willing to spend is the minimum, the one-year patch that they 
know has to happen, that will happen, whether they propose it 
or not, but they spend all the money that this tax would 
collect.
    So, I am trying to find out if it is, in fact, a priority, 
if they are willing to put something on the line to deal with 
some of the other--either their spending or their tax 
proposals. If not, that is fine. If we are kind of on our own, 
and it's not a priority of theirs, and they are not going to 
help us, budgetarily, or in tax policy, that is okay. They will 
cooperate, but they won't put anything forward.
    I think it is a legitimate question to ask. That's why I 
turn to you, Mr. English, and our Chair, to have some help in 
crafting the request, because I may not have artfully enough 
expressed it.
    Chairman NEAL. I think that the gentleman's point is well 
taken, and I think there will be an opportunity, when the 
hearings are concluded in about 3 weeks, to have an opportunity 
to speak with the Secretary of the Treasury as well, at that 
moment, as we begin to proceed with what we believe to be a 
solution for this issue.
    The gentleman from Texas, Mr. Doggett, will inquire.
    Mr. DOGGETT. Well, I believe Mr. English is correct, at 
least in part, that the Administration has been very forthright 
and direct about this. You believe it's a priority to solve 
this problem for the next year, and you have a proposal to do 
that, right?
    Mr. SOLOMON. That is correct.
    Mr. DOGGETT. As far as a long-term proposal, you have had 
six years to propose something, and neither then nor today have 
you viewed it as a high enough priority to propose anything, 
and today you have no proposal whatsoever, other than to say 
you will work with us and listen if we can come up with a 
proposal, right?
    Mr. SOLOMON. Our proposal is similar to what the Congress 
has done since 2001, with----
    Mr. DOGGETT. Patch on top of patch, or Bondo on top of 
Bondo. You have no other proposal, right? Today? Other than 
your cooperation?
    Mr. SOLOMON. We look forward to working with you----
    Mr. DOGGETT. Cooperating. I heard that from Mr. Partman, 
earlier. Mr. Partman, who, when he testified to our Committee 
and the Budget Committee, did at least concede that without 
counting the AMT dollars, to which Mr. Blumenauer just 
referred, this Administration, President Bush, has not 
submitted a balanced budget. Of course he has never submitted a 
balanced budget to us, so that doesn't come as a great 
surprise, and there is no balance in the budget he has 
submitted, even in the future, because he includes this AMT 
revenue in order to achieve it.
    Ms. Olson, first, I really appreciate the work you do as 
our taxpayer advocate. I read your reports each year, and have 
offered legislation on a few of the provisions, but I think 
they are extremely helpful to us.
    You mentioned that there are a number of tax avoidance 
schemes that some of our wealthier neighbors utilize to avoid 
paying their fair share of taxes, but that these are not 
reached by the AMT.
    It just seems to me--and I guess I would direct this 
question to Dr. Burman, too--that we may have the very flawed 
implementation of this policy, but the notion that all 
Americans should contribute something toward our National 
defense, if they have prospered in this country, is not unlike 
my feeling that all corporations should, and that we should not 
permit the amount of tax avoidance, which this Committee has 
traditionally been the number one protector of, by corporations 
who go offshore and dodge their taxes, but even want to do work 
at taxpayer expense.
    Isn't there a way, as we look at the AMT, of preserving the 
concept that Americans all have a responsibility--once they 
reach a certain level of prosperity, at least--to share in the 
cost of our government?
    Ms. OLSON. I have tried to think about how you could leave 
a minimum tax, eliminate things like the State and local 
preferences and add-backs, or the dependents exemption, the 
standard deduction, or medical expenses that are itemized 
deductions, and replace them with items that are more targeted 
to the kind of abuse that we saw back in 1966 and 1969.
    My concern is that you just wouldn't make--it still 
wouldn't be enough to make up the revenue impact, because so 
much of the AMT revenue is coming from these other items. I 
even personally witnessed that in 2001, when we first 
recommended repeal. We had some other alternative suggestions: 
index the exemption amount for inflation, which was more modest 
at that time; or simply say anybody with gross income under 
$250,000 wouldn't pay it.
    Today, because of the passage of time, those solutions will 
not do it.
    Mr. DOGGETT. Thank you. Dr. Burman?
    Mr. BURMAN. I think you could maintain an AMT that did a 
better job of reigning in tax shelters than the current one, 
and still spare virtually the entire middle class. What you 
would do is what Ms. Olson suggested, get rid of those middle 
class tax preferences, no longer punish people for having kids 
or State and local taxes.
    The other thing is to index it for inflation, so inflation 
doesn't push people on to the AMT. I would also restore 
something that was in the AMT prior to 1987, which is to tax 
capital gains and dividends as other income. That was the 
biggest preference item in the AMT before 1987.
    Virtually any tax shelter you can imagine on the individual 
side eventually shows up as a capital gain. Basically, what tax 
shelters do is they convert ordinary income that is taxed at 
rates up to 35 percent into income that is taxed at the low 
capital gains rates or dividend rates of 15 percent.
    Mr. DOGGETT. Thank you very much. I yield back.
    Chairman NEAL. The gentleman from New York, Mr. Reynolds, 
will inquire.
    Mr. REYNOLDS. I thank the Chairman for the opportunity to 
ask a few questions. I have learned a lot today about Bondo, a 
little bit about Bush tax cuts, and whether they're oppression, 
or whether Americans got an opportunity to all take advantage 
of it. I heard we have had an orgy of tax cuts.
    What I haven't heard in all of the history that has come 
from the majority in both observations and questions is a 
reminder that while there are some opinions, both by possibly 
panelists as well as Members of this Committee that 2001 and 
2003 Bush tax cuts caused some of the problem, I haven't heard 
anything come from the majority relative to reminding us that 
in 1969 it was a Democratic-controlled Congress that created 
AMT, or that in 1986, when one of my predecessors was in 
Congress, that we saw modification that didn't include changing 
AMT.
    We have seen in 1993, the largest tax increase in the 
history of the country, and there have been some that have 
outlined that in 1993, that tax increase accelerated the amount 
of people that are in the AMT consideration. We can't forget 
that in my freshman year--many people have been much longer 
than I--we passed a repeal the AMT and sent it to the 
President, and it was vetoed. So, we have had both parties 
intricately involved in creating and looking at and touching 
and hoping to fix AMT.
    There is a 1 trillion estimate to do a permanent fix. What 
I might ask the panelists is as you look at Senator Grassley, 
who is introducing a bill to repeal the AMT, he used in his 
words, ``It's simply unfair to expect taxpayers to pay a tax 
they were never intended to pay. It's even more unfair to 
expect them to continue paying for that tax, once we get rid of 
it.''
    So, my question under pay-as-you-go rules, the House would 
have to find close to $1 trillion of offsetting tax increases 
to repeal the AMT. I wonder if anyone might say, ``Are there 
folks who are not paying enough in taxes,'' that they're so low 
that you see a category where we should raise them, in order to 
fix the AMT? Or should Congress forgo and waive the Pay-go for 
the purpose of doing a permanent relief? My first question.
    The second is Chairman Rangel is quoted as outlining the 
fact in a report to Bloomberg that they may rearrange tax rates 
so wealthy Americans pay more to prevent the AMT from hitting 
the middle-class income households, rearranging the rates. I 
just wonder what your thought might be of whether this 
Congress--and particularly this body--should look at using that 
approach for your consideration.
    If the panels would, take the questions as they might.
    Mr. BURMAN. The question of whether you need to offset the 
revenue lost from eliminating the AMT has come up before. The 
fact is that Congress was counting on the AMT when it enacted 
the tax cuts in the first place, and actually, it was a way of 
sort of enabling the tax cuts by reducing the measured cost by 
about a third.
    If the country were swimming in tax revenues right now, if 
we were looking at surpluses, then of course it would make 
sense to look at tax cuts. The problem is that we are looking 
at some very serious budgetary problems in the long-term. In 
2010, the Baby Boomers are going to start retiring. Even if you 
get the entitlements under control, it is going to put 
unprecedented demands on the government, and we are already 
running deficits.
    In my view, we ought to be, at a minimum, thinking about 
how to get the budget under control in anticipation of the huge 
demands that are going to be put on the country in the future.
    Saying that some people would have to pay higher taxes to 
offset the loss from the AMT, given that we were counting on 
that revenue all along, is not particularly unfair. I think it 
makes sense, as a matter of policy, to replace what is an 
irrational tax with a rational one. You can't do that without 
having some people pay higher taxes. You can't replace an 
irrational tax with a rational tax without changing things.
    Mr. SOLOMON. One aspect of this question that one has to 
take into account is the amount of revenues that is the 
appropriate target for the government to take in. That is, what 
percentage of the economy should be taken for government 
purposes?
    That is an important question. What is the level of 
revenues that should be collected through the tax system? The 
historical average has been around 18 percent of gross domestic 
product (GDP). Now it's about 18.4 percent. So, with respect to 
what you think the proper level of taxes is, and what you think 
the proper solution to AMT is, you need to take that into 
account.
    As of now, it is projected that the share of taxes to GDP 
in this country is expected to rise to perhaps 19 or 20 percent 
in the next 5 to ten years. So, that needs to be considered in 
deciding how you want to deal with the AMT.
    Ms. OLSON. I would just like to suggest that we don't have 
a lot of time to think about this. If we see that 26 percent of 
the taxpayers who are paying tax, who actually are the ones 
paying the revenue that are funding the government, are going 
to be pulled into this irrational tax, that you may actually 
see an erosion of participation in the tax system, that they 
will just become so disaffected, because they have to calculate 
their tax twice, or they have to pay someone to calculate their 
tax.
    So, it's not just what's the proper amount of revenues that 
should come in, but whether your taxpayers are going to pay 
them.
    Mr. VIARD. Mr. Congressman, I think that there are a number 
of ways that the cost of AMT relief, or AMT repeal, can be 
handled. I do think it would be preferable, in view of the 
fiscal imbalance we face, to try to address those costs today, 
rather than later.
    I think the increases in marginal tax rates that some have 
talked about would not be the ideal way to finance it, that 
base broadening under the regular income tax would be a far 
preferable strategy.
    Mr. REYNOLDS. Thank you, Chairman.
    Chairman NEAL. I thank the gentleman. The gentleman from 
California, Mr. Thompson, will inquire.
    Mr. THOMPSON. Thank you, Mr. Chairman.
    Mr. BLUMENAUER. Mr. Thompson, would you yield for 20 
seconds?
    Mr. THOMPSON. For 20 seconds? Sure.
    Mr. BLUMENAUER. Thank you. I was listening to my friend 
from New York talk about the history, and wonder why these 
things hadn't been raised. I would just note I didn't want to 
get too partisan in my line of inquiry. I was risking 
something, but this 1969 tax was birthed in the Nixon 
Administration. The 1986 changes in the tax code were under the 
watch of my fellow Oregonian, Bob Packwood, Republican from 
Oregon, who was probably the major architect in the Reagan 
Administration.
    I do think that there are Republican fingerprints all over 
this. I didn't want to bring this up, because we don't want 
this to be partisan.
    Mr. ENGLISH. Will the gentleman yield?
    Chairman NEAL. It's Mr. Thompson's time.
    Mr. THOMPSON. I'm going to be out of time before we get 
going.
    Mr. Solomon, it has been brought up by a number of my 
colleagues on the dais today that the current budget proposes 
to make just about every tax cut known to mankind permanent, 
but only provides for a one-year fix in the AMT.
    I just want to draw on one particular part of your 
testimony, where you say, ``A permanent solution to the AMT is 
essential for the continued functioning of our individual 
income tax system.'' If you believe that, don't we need a 
permanent fix?
    Mr. SOLOMON. We do need a permanent fix to the AMT.
    Mr. THOMPSON. Then why is it part of the budget?
    Mr. SOLOMON. It's not part of the budget. We have an 
immediate problem, which is for 2007, which has already begun. 
The immediate problem is to deal with 2007.
    So, to deal with the immediate problem, the budget includes 
a one-year patch.
    Mr. THOMPSON, but we have been doing the one-year patch.
    Mr. SOLOMON. I understand. The President's budget proposal 
is consistent with that, but it also important that we take the 
time to examine permanent solutions to the AMT.
    There are a number of possibilities that we can consider: 
for example, dealing with the exemption on a long-term basis, 
dealing with the rates----
    Mr. THOMPSON. It just seems to me--and other people have 
already said it--but the budget is the priority of our 
Administration, it's a priority of our country. If it's not in 
the budget, it is just--you can spin it any way you want, it's 
just not a priority.
    I tend to agree with you that this does need to be fixed, 
and needs to be fixed on a permanent basis. Any one-year 
patches, we're just obfuscating the potential problems, and the 
real need to do our work.
    Ms. Olson, if taxpayers--you have noted that this is a 
particularly difficult system to navigate, and a lot of people 
just don't even know about it. If a taxpayer does his or her 
own tax work, and they fail to do it under the AMT, and they 
later found that they should have, what happens?
    Ms. OLSON. Well, the IRS has systems that will check 
whether you have--based on how we plug in the information from 
the return that we get--and it will just tell us that you 
should have calculated the AMT.
    Mr. THOMPSON. So, do you get a penalty?
    Ms. OLSON. You will get a letter from the IRS, and then you 
will get a penalty for--certainly you will have interest, and 
then you will get a penalty for failing to pay, unless you can 
show reasonable cause. Ignorance of the law is not an excuse.
    Mr. THOMPSON. So, if you just say, ``This is really 
confusing, I didn't know about it''----
    Ms. OLSON. That's not good enough.
    Mr. THOMPSON. You still get your--so there is a bunch of 
taxpayers out there who are apt to get hit with this penalty?
    Ms. OLSON. Yes. One of the things that we point out is that 
because it is so hard to know until all of your information is 
at the end of the year, you can't predict when you will be hit 
by the AMT.
    So, even if you calculate it correctly, you may have to 
get--you may be charged an estimated tax penalty, because you 
didn't pay in enough money during the year to pay the 
alternative----
    Mr. THOMPSON. Right. Does the IRS do an outreach to let 
people know that this is a problem they ought to be watching 
out for?
    Ms. OLSON. The IRS has been working on a publication. It is 
one of the few issues that we don't have a publication on, 
which----
    Mr. THOMPSON. What do you think happens? You get your 
publication done first, or we fix this permanently first?
    Ms. OLSON. That would be a hard one to predict.
    Mr. THOMPSON. That's what I was afraid of. Dr. Burman, you 
have given us several options as to how to deal with this. Do 
you have a favorite? If you were the benevolent tax czar, what 
would--how would you do it?
    Mr. BURMAN. I think there is actually a lot of merit to the 
tax reform panel's proposal to eliminate State and local tax 
deduction. I know that's not politically very popular, but it's 
going away on its own, and it does make things more 
complicated. If you didn't have a State and local tax 
deduction, fewer people would have to itemize, and it would 
raise more than enough revenue to eliminate the AMT.
    Mr. THOMPSON. It just goes to show you should not ask a 
question you do not already know the answer to. Thank you.
    Chairman NEAL. I thank the gentleman. The gentleman from 
Virginia, Mr. Cantor, will inquire.
    Mr. CANTOR. Thank you, Mr. Chairman. You know, I appreciate 
the panel being here. It has been a very interesting 
discussion, educating one for me.
    It seems to me, though, as we are looking to try and find 
not an easy, but a sensible way to address this growing 
problem, that perhaps we ought to look at the 1993 tax hike 
that essentially raised the AMT from a 24 percent flat rate to 
a dual tax rate of 26 percent on AMT income up to $175,000, and 
28 percent on AMT income above that amount.
    You know, I know that joint tax has done an analysis which 
has shown that about 11 million more Americans will have to pay 
the AMT next year, thanks to the higher post-1993 AMT rates.
    So, if it is in our interest to really shield, or spare, 
the average American--and as my friend from Oregon--I think 
he's no longer--wants to make sure the social worker, the fire 
fighter, and the teacher is protected from the AMT, then the 
cleanest solution would be to repeal the Clinton AMT tax rate 
hikes, and basically move back to a pre-Clinton 24 percent, and 
then index the exemption for inflation at the 2005 level of 
$40,250, which would now mean $58,000 for a joint return.
    What I have read, that--going back to this--would mean that 
only about 2.6 million taxpayers would be--filers--would be 
subject to an AMT penalty next year, instead of the 23 million 
that we are anticipating under current law. So, I would like to 
put that out to the panel for comment, number one.
    Number two, also, maybe Dr. Viard or Mr. Solomon could 
answer the question about when we are operating under the 
majority's PAY-GO rules, and they are looking to try and ``pay 
for the AMT fix,'' and if the proposal is to do so by repealing 
the death tax, perhaps, or ending the repeal to death tax, or 
repealing the rate cuts on cap gains--dividends, especially--
will not that have a global effect, in terms of economic 
activity generation, and in essence, we will then be suffering 
from a decline in economic activity, a decline in revenues, 
that will then not serve the purpose that we were trying to do 
anyway, under the PAY-GO rules that they put in place, which is 
to, again, ``pay for the AMT fix?''
    Mr. SOLOMON. You've asked at least two questions, and I 
will try to address each one of them.
    First, you mentioned the 1993 rate adjustments. The 1993 
rate adjustments are just one change among many changes to the 
AMT that have caused it to become a large issue. One of the 
possibilities that one might consider is to change the rates, 
as I mentioned just a few minutes before.
    I think also, as perhaps you mentioned, it would be 
important to index the AMT and all the parameters of the AMT, 
as well. So, changing the rates and indexing various parameters 
would help reduce the impact of the AMT.
    With respect to other proposals, you would have to take 
into account the repercussions, the consequences of those 
proposed changes.
    For example, the lower rate on capital gains and dividends, 
which was part of the 2003 tax relief, we believe was very 
important for economic growth, and we have had sustained 
economic growth since that time. There has been a very positive 
economic recovery. Therefore, there would be, we believe, very 
important ramifications that you would have to take into 
account with respect to any of the changes that you have 
suggested.
    Mr. BURMAN. I would like to make a quick comment about the 
effect of the 1993 Act. All of the measured effect that you 
were talking about actually would have come from indexing the 
exemptions, starting from 1993. If you did that, it would 
reduce the number of people on the AMT.
    Basically, if we had indexed the AMT exemption at any point 
in history, the problem would be a lot smaller. The AMT Act did 
raise the rate on the AMT, but it also raised the exemption. If 
all you did was replace the current exemption and rates with 
the 1993 exemption and rates, you would actually have more 
people on the AMT, although they would be paying less tax.
    So, indexing is the story, but the change in 1993 was not.
    Mr. VIARD. I want to agree with you, Mr. Congressman, that 
reinstating the estate tax, or raising tax rates back up again 
on capital gains and dividends would be undesirable ways of 
trying to finance AMT relief, because that would increase the 
tax burden on savings and investment, which is the most harmful 
economic distortion that the tax system imposes.
    It would be far preferable, as I said earlier, to pursue 
base broadening within the regular income tax that does not 
involve increasing the tax burden on savings and investment.
    I think that Len actually mentioned one very interesting 
option just a few minutes ago, which is to repeal the State and 
local tax deduction. There are others that also could be 
pursued.
    Chairman NEAL. I thank the gentleman. Ms. Schwartz.
    Ms. SCHWARTZ. Thank you, Mr. Chairman, and first I want to 
say I think my colleagues did a really good job of presenting 
the concerns we have from the budget Committee point of view. I 
thought they made it very clear that if we don't do something 
about it--and the Administration has not proposed anything but 
a one-year fix, and we're even hearing from the other side of 
the aisle that a trillion dollars in additional--we don't 
really worry about it. The Administration is not worried about 
it. The other side of the aisle is not worried about another 
trillion dollars of debt, though I guess we're going to have to 
borrow from another foreign country to make ends meet.
    I think on the budget Committee we do care about it. So, 
what I wanted to do though is to take that to the--a little bit 
more to some of my constituents who are going to see the effect 
of the Administration's proposal, which is a one-year fix and 
then no other change, the AMT stays in place.
    As I understand it that really means that people--families 
who are within $100,000, $150,0000 will be paying more. They'll 
be paying the AMT. That's what the budget looks like, that's 
what the proposal is because we only fix it for one year, and 
that in fact that means that they will be paying for this 
benefit for someone else, that we're really taking, really at 
this point at least in my district--really perceive themselves 
as middle class taxpayers who are going to be paying for the 
tax cuts that the Bush Administration has put in, since there's 
no changes in that.
    In fact, in my district we're looking about half of the 
taxpayers who are affected. On this panel actually more of my 
constituents are affected by the AMT than anyone else, which is 
kind of interesting. I didn't realize that until we got some of 
these numbers, but the group, the adjusted gross income group 
are those people at $100,000 to $200,000 family income, not the 
people making over $500,000, a million, two million, three 
million dollars.
    Given the intention of the AMT, isn't it true that those 
people who are making $100,000 will be paying, both for the 
Bush tax cuts and really helping out much wealthier Americans 
because they're going to be paying it and other people won't? I 
guess I would ask Mr. Solomon, since it's the Administration's 
proposal that's suggesting this.
    Mr. SOLOMON. We very much share your concern about the 
effect of the AMT on the middle class and the effect it will 
have if it's not fixed in the future, given that it will affect 
an increasing number of taxpayers. The Administration's 
proposal for a one-year patch is a first step to deal with this 
issue.
    We agree with you that there should be a long-term 
solution.
    Ms. SCHWARTZ. You've said that several times, and I think 
the Administration has been suggesting a one-year patch for six 
years.
    Mr. SOLOMON. Which is consistent with what the Congress has 
done for the last six years. I would agree with you. I'm in 
agreement with you with respect to the importance of this issue 
and that we do not want the AMT to affect the middle class.
    Ms. SCHWARTZ. So, you agree that it is the middle class, 
the $100,000 family income that's going to be hit the hardest 
if we don't do anything about it?
    Mr. SOLOMON. I do not have the numbers before me, but it is 
true that the group between $100,000 and $200,000 will be 
affected significantly if the AMT is not fixed after 2007.
    Ms. SCHWARTZ. I can't speak for all Americans but I can 
tell you the numbers we got on this panel, every member, the 
constituents we represent, the group hit the hardest is 
$100,000 to $200,000. So, you're confirming that that's who is 
going to get hit.
    Mr. SOLOMON. If the AMT is not fixed they will be 
significantly impacted by the AMT, I do agree with that.
    Ms. SCHWARTZ. The Administration, the President's proposal 
is to--really is hollow. It is to postpone it for one year, 
patch it for one year and then no suggestions about how to fix 
it for the future.
    Mr. SOLOMON. It is the first step in dealing--the 
President's proposal, the Administration's proposal is the 
first step toward finding a long-term solution to this issue.
    Ms. SCHWARTZ. So, how much--I've only been for one term, so 
how much progress had you made when you made the same proposal 
four years ago, five years ago? This has been six years of--
we're going to do it one year and then we're going to make some 
progress, we're going to have some discussion.
    So, since--from what--year, you've not made any progress. 
So, what makes you think you'll make more progress this year?
    Mr. SOLOMON. There has been progress. That is, the number 
of AMT taxpayers has been kept at a minimum over the last six 
years.
    Ms. SCHWARTZ. By doing a one-year-at-a-time patch?
    Mr. SOLOMON. It has been through short-term, temporary 
patches. That's correct.
    Ms. SCHWARTZ. So, is the intention to do a patch for next 
year and then the year after and then leave it to the next 
President?
    Mr. SOLOMON. We hope to work with you to find a long-term 
solution for this problem. We share your concerns. The question 
is how will we deal with it moving forward.
    Ms. SCHWARTZ. I think `share your pain' is probably not 
going to be enough. I would think we need some--and I would say 
some really specific proposals.
    Again, our Chairman is really working hard on this, and I 
think is interested as we all are in creating that fix, but 
come on, you're the Administration, you have lots of specific 
proposals. I'd like to see some very specific proposals for the 
changes to the President's tax cut that you think have to be 
made in order to fix this or something new.
    I think it's not good enough to just say, ``we're open for 
suggestions.'' Thank you.
    Chairman NEAL. I thank the gentlelady.
    Mr. Solomon, let me do some followup based on what the 
gentlelady from Pennsylvania has said. I think it might 
highlight some of the frustration that we do feel. Let me just 
read some quotes to you.
    ``We estimate that the number of individuals affected by 
the AMT would almost double under the Bush proposals.'' That 
comes from Joint Tax. That's not a partisan organization.
    ``It is true that the AMT would eat away at some of the 
benefits flowing from the President's tax proposals as compared 
to the absence of an AMT interaction with the rest of the tax 
code.'' That's the Secretary of the Treasury, Mr. O'Neill. 
``Otherwise, we are giving people a tax decrease on one side 
and a tax increase on the other side, and they aren't really 
getting what we said they were going to get.'' That's Senator 
Charles Grassley.
    The 2001 tax cut bill ``will roughly double the number of 
AMT taxpayers in most of the last years of the budget window so 
that in 2010 an estimated one-third of all taxpayers will be 
subject to the AMT.'' That's the Treasury economist Jerry 
Tempalski.
    These are all quotes, as the gentlelady said, from 2001. As 
I've indicated, they're not partisan positions. I accept your 
word that you'd like to work with Members of the Subcommittee 
and the full Committee and the Members of the house but there 
has to be something that moves beyond the level of testimony to 
really tackle this issue because I want to tell you--it's the 
intention of the Chairman of the full Committee to tackle this 
issue in the next couple of months.----
    So, I assure you that we appreciate your desire to work 
with us but this is not going to go away. We intend to do the 
followup based on what I proposed.
    If you'd like to comment, please.
    Mr. SOLOMON. Yes, just a few comments. First, there have 
been a couple of references that the President's tax relief is 
the cause of the problem. I just want to reiterate that in my 
view the source of the problem is the AMT itself, and we need 
to recognize that.
    The AMT causes a penalty for being married. It causes 
negative effects on families because the personal exemptions 
are denied. It denies the standard deduction. It denies 
personal exemptions. It denies the itemized deduction for State 
and local taxes. All of these things are part of the AMT and 
they need to be--and they need to be addressed.
    In terms of particular kinds of proposals, some of the 
things that might be considered, for example, are increasing 
the exemption or reducing the rate. Those are some of the 
things that one might consider.
    Chairman NEAL. Dr. Burman, would you like to comment?
    Mr. BURMAN. Well, I disagree with Mr. Solomon that the 2001 
tax cuts are not a factor. I think we were counting on the AMT 
revenue when the 2001 tax cuts were enacted. It made them 
appear to be much less costly in terms of revenue than they 
actually turned out to be.
    I think we need a permanent solution. I'm glad that the 
Administration says they want to work toward a permanent 
solution. I think the response from Mr. Thomas to my response 
to what my favorite solution is suggests that it's harder for 
politicians to fix this than for economists to do it, so it's a 
difficult problem.
    We could have come up with 20 different solutions and none 
of them would be ones that you could just go back to your 
constituents and say, ``hey, I've got the solution and 
everybody is better off.'' The fact is that this tax is a 
capricious tax. It's not hitting the people that you think it 
should be hitting. If you're going to make up the revenue with 
something that makes sense, some other people are going to be 
paying more tax.
    My preference would be to shift the tax burden onto people 
who are most able to pay, the ones who benefited the most from 
the economic expansion of the last two decades, but that's 
obviously not uncontroversial.
    Chairman NEAL. I thank you. Mr. Blumenauer, would you like 
to further inquire?
    Mr. BLUMENAUER. I would like to just follow up with Dr. 
Burman.
    I must note, in your testimony you've got the couple in box 
one that is just $75,000 of income, a teacher and a 
firefighter, actually not a well paid teacher and a junior 
firefighter, frankly, with four children, who pay a $2,000 
surcharge to the AMT in 2007.
    As you point out further in your testimony, by 2010 we're 
going to be in a situation where less than 40 percent of the 
millionaires--not millionaires, people who make a million 
dollars a year or more will be subject to the AMT, but 94 
percent of the $200,000 to $500,000--it just--I want to commend 
you for examples that show how starkly this is perverting what 
we are attempting to do with the tax code.
    I would like, if you would, to just elaborate where you 
were a moment ago. You were taking modest exception to the 
Secretary about whether or not the 2001 tax cuts figured into 
this. You've already pointed out that it doubled the number of 
people who were impacted when there was a chance, when there 
were trillions of dollars theoretically available, and they 
weren't spent to ameliorate it. In fact, it made it worse.
    As you pointed out this money was used--in the AMT was used 
to justify larger tax cuts if they were ``affordable'' by 
assuming this revenue. Now, as I pointed out in the earlier 
round, this money is assumed in the next round of budgets that 
are being proposed other than the one year.
    I wonder if you could comment on this--on how much more 
difficult resolution is going to be if we were to take the 
approach recommended by the Administration, which is spend it 
all except the one-year patch as opposed to making some 
adjustments in the tax code, not making it worse, not extending 
it, not complicating it further, but redirecting to be able to 
have some of the simpler approaches that you've suggested.
    If you wanted to sort of elaborate on the difference 
between these two in terms of ultimately being able to solve 
the problem--spend it all versus making some adjustment and try 
and get on it sooner rather than later.
    Mr. BURMAN. Well, I certainly agree that the sooner you 
deal with the AMT--and Ms. Olsen made this point in her 
testimony. The sooner you deal with it, the easier it's going 
to be. Every year the cost goes up by a lot because you're 
adding another year with $200 billion of revenue costs.
    I don't want to get into assigning blame, into a discussion 
of that.
    Mr. BLUMENAUER. If the tenor of my question suggests that I 
was suggesting you assign blame, please don't. I just want you 
to assess the difficulty of the two approaches.
    Mr. BURMAN. I think it's better to deal with it now than to 
put it off. I you do, this Congress will be remembered as the 
one that dealt with the really hard issue that had escaped the 
grasp of Congresses of both parties for the last 25 years. I 
think it would be great.
    Ms. OLSON. If I might make an observation, the AMT, just to 
remind folks, is not just about cost or at least the dollar 
cost. It's about the cost on taxpayers themselves. So, as more 
taxpayers are pulled into this system more taxpayers are having 
to go through the process of calculating their income tax 
returns twice, and that is an enormous compliance cost for 
taxpayers alone, and it does have an effect on the tax system 
overall.
    Mr. BLUMENAUER. Ms. Olsen, I really appreciate your 
elaboration.
    Mr. Chairman, one of the things that I hope we might be 
able to do if maybe some of our expert witnesses can help guide 
us in this point. Dealing with these lower income families that 
are being caught in the net--you know, the reference that Dr. 
Burman had to the $75,000--getting--if we can have some sense 
of what the costs of tax compliance will be as a percentage of 
what they're paying--and I--maybe, Mr. Secretary, you've got 
something in Treasury, maybe our tax advocate has it, but it 
just seems to me that we're going to be looking at a lot of 
people who are going to be paying maybe an extra $500, $1,000, 
$2,000, $2,500, but they're going to be paying an accountant an 
extra thousand dollars for this $1,500 bill.
    Chairman NEAL. I think that the next panel that we've 
scheduled--we're going to hear from the practitioners and then 
we're going to hear from those who have born the burden of AMT, 
and we'll have an opportunity to hear not just anecdotes, but 
attach them to real stories.
    I thank the gentleman from Oregon.
    Mr. English.
    Mr. ENGLISH. This has been an excellent panel, Mr. 
Chairman. I would say the one comment I would make is that 
there certainly has been, through this line of questioning, a 
focus on the way--on the AMT that I find surprising, one, 
blaming the Administration or the Administration's tax policies 
for the problem when of course we go back to the last 
Administration and they threw away an opportunity to actually 
repeal flat out the AMT at a time when it would have been a 
much more affordable solution.
    I don't want to join my colleagues in making partisan 
political statements but I do think that it is fair to say that 
pro-growth tax policies are not the reason why the AMT has been 
a growing problem, and the attempts to somehow link recent tax 
relief programs to the growth of the AMT instead of tying it to 
mere inflation and the growth of the economy reminds me of some 
of the Presocratic philosophers; concepts like Xeno's paradox 
where somehow Achilles is never going to quite capture the 
tortoise because he's moving along a straight line.
    The idea that somehow tax relief has exacerbated the AMT is 
a strange, abstract argument, but I am delighted that some of 
my colleagues have put on the Administration a challenge that 
reasonably can be moved back to them if in fact they feel this 
is something that needs to be addressed in the short term. They 
certainly have the opportunity to do it and I am certainly 
prepared to work with them.
    As co-Chairman of the zero AMT caucus, I have been looking 
for that kind of a partnership for years. I thank the Chairman 
for having provided this opportunity to explore some of the 
problems with the AMT, and I would simply want to ask the panel 
as a closing question, is not the elimination or reform of the 
AMT something best done in the context of something that in the 
last Bush Administration was a--or I should say the first Bush 
Administration--was considered to be one of the priorities to 
drive their tax discussion, and that is fundamental tax reform.
    As you noted, Dr. Burman, the AMT was one of the things 
that the President's tax panel did focus on and in fact 
explored one possible solution, you know, one that doesn't 
necessarily appeal to me as a former city finance officer, but 
the eliminating the deductibility of State and local taxes, 
which at least would have some reasonable distributional effect 
and would also be an approach that would end the obvious 
inequity that Federal taxes are paid less by those from high 
tax jurisdictions.
    Is not this issue, very quickly, for each of you, best 
dealt in the context of a fundamental overhaul of the Code 
given the dimensions of the AMT problem? Dr. Viard.
    Mr. VIARD. Yes, Mr. Ranking Member. I agree that the 
fundament tax reform would be the best context in which to 
address this. It is such a big problem that a permanent 
solution to the AMT, particularly if there is offsetting 
financing through something like the repeal of the State and 
local tax deduction would itself almost qualify as a 
fundamental tax reform by itself.
    So, I think it would be best to address it in the context 
of something very broad based, whether that be a move to a 
consumption tax, as I would prefer, or whether it be a 
restructuring of the income tax.
    Mr. ENGLISH. Dr. Burman.
    Mr. BURMAN. I agree with you. I actually came to Washington 
to work on what became the Tax Reform Act 1986. It used to be 
that people perceived the income tax as the fairest tax. Now 
they perceive it as the least fair tax.
    The income tax actually is at its heart a very fair tax 
system. It's progressive. It raises a much larger share of 
revenue from those who are most able to pay, but it's too 
complicated. I think that before too long we need to fix the 
income tax so that people will support it as we're demanding 
more from it to finance the growing demands of the government 
as the Baby Boomers retire.
    Mr. ENGLISH. Ms. Olson.
    Ms. OLSON. Well, I've often noted the need to repeal or 
deal with the AMT is going to drive fundamental tax reform 
because it will eventually cost more to repeal the AMT than it 
is to repeal the income tax, the regular tax and leave the AMT.
    I would also add that we don't have time. I've 
characterized the AMT at times as a time bomb with a short 
fuse, which almost sounds impossible because you can't have a 
time bomb with a fuse, but it is ticking away, and it is also 
exploding every single year as we either have to have a revenue 
hit to do the one-year patches in order to keep people off of 
it. We have to address both.
    Mr. ENGLISH. Mr. Solomon.
    Mr. SOLOMON. Yes, the long-term solution to the AMT could 
be considered as part of tax reform. The only comment I want to 
add is that we also have a short-term problem. We have to deal 
with AMT for 2007.
    Tax reform is going to take longer than that, and so it is 
important that we deal with the issue for 2007, a year that has 
already begun, which is consistent with the Administration's 
proposal.
    Mr. ENGLISH. Thank you.
    Chairman NEAL. The gentleman from Texas.
    Mr. DOGGETT. I will just agree particularly with what Ms. 
Olson just said. Fundamental tax reform is fine, but I've been 
through 12 years of Republican rule. In fact, I've never known 
anything else in the House until this year, and they never once 
brought fundamental tax reform proposals to a vote in this 
Committee or anywhere else.
    President Bush has had six years to propose fundamental tax 
reform. He has yet to offer a specific proposal to do that.
    I think you're right. This is a time bomb. While we do need 
more comprehensive reform we ought not to wait for the perfect 
reform if one exists in order to try to provide some redress to 
middle class taxpayers.
    Mr. ENGLISH. Will the gentleman yield?
    Mr. DOGGETT. I'll yield.
    Mr. ENGLISH. Will the gentleman then be in favor of perhaps 
considering in this Congress' fundamental tax reform?
    Mr. DOGGETT. Well, the gentleman has had a majority for the 
last 12 years and was unable to----
    Mr. ENGLISH. Now you do. Are you willing to do it?
    Mr. DOGGETT [continuing]. And controlled this Committee and 
never once did it. I'd be willing to----
    Mr. ENGLISH. Are you willing to do it?
    Mr. DOGGETT. I'd be willing to consider any proposal you 
want to advance, but the only ones that we've talked about in 
the Committee rather than voted on have been ones that simply 
shift more of the burden to working people and less of the 
burden to the people that are already trying to dodge and avoid 
their taxes, and that kind of fundamental tax reform is 
fundamental tax deform, not reform.
    Mr. ENGLISH. Then I encourage the gentleman, look at my 
fundamental tax reform proposal, the simplified USA tax, and I 
don't think that he can make the same claim about that. I yield 
back.
    Mr. DOGGETT. I will do so.
    Chairman NEAL. I would note today that for the panelists 
and the members of the audience that you could see what new 
leadership has brought. There are more esoteric arguments.
    We began with St. Augustine, we moved to Achilles, but I 
must tell you after all these years of being on this Committee 
and dealing with tax policy, the real test is Sisyphus, to 
continue to roll this boulder back up the hill.
    I thank the panelists. This was most informative, and I 
look forward to the next round of hearings, but most 
importantly a solution. This meeting stands adjourned.
    [Whereupon, at 3:42 p.m., the hearing was concluded.]
    [Questions submitted by the Members to the Witnesses 
follow:]

           Question submitted by Mr. Johnson to Eric Solomon

Question: Section 402 of Public Law 109-432 addresses the problem of 
        stranded AMT tax credits. When I introduced the bill on this 
        topic (H.R. 3385) and when it was reviewed by Legislative 
        Counsel and the Joint Committee on Taxation, the intent of the 
        law was to make sure that individuals were able to use their 
        stranded credits in no more than five years. We fully intended 
        that individuals could get credits back in 20 percent 
        increments over five years. Is that your understanding of how 
        the new law works?
Unfortunately the law did not have any report language associated with 
        it. However, it is clear to me that Congress was attempting to 
        put this mess behind our constituents who voluntarily came 
        forward to report this tax situation. Those taxpayers who never 
        reported these Incentive Stock Option transactions are likely 
        to have evaded this tax burden due to the fact that there was 
        no reporting to the IRS of these transactions. For taxpayers 
        who are known to the IRS, I would strongly encourage you to 
        settle out these cases in a fair manner and to stop accruing 
        additional interest and penalties. Mr. Assistant Secretary, I 
        would encourage you and the IRS to simply settle out these 
        cases as expeditiously as possible.
Answer: Section 53(e) of the Code, as added by Pub. L. No. 109-432, 
        Sec. 402, provides special rules that make so-called stranded 
        AMT tax credits refundable through 2012. The provision allows 
        an annual AMT credit equal to the greater of 20 percent of the 
        taxpayer's long-term unused minimum tax credits (stranded 
        credits) or 5,000 (or the remaining amount of long-term unused 
        minimum tax credits, if smaller than 5,000). Under the statute, 
        it is clear that taxpayers with stranded credits over $25,000 
        will not fully recover the entire amount of these credits 
        within five years. This is because for 2008 through 2012, the 
        amount of the stranded credits will be reduced by the amount 
        refunded in the prior year, and thus, the 20 percent will be 
        multiplied by a smaller amount, not the original amount of 
        stranded credits. For example, assuming that in each year a 
        taxpayer could not otherwise use AMT credits to offset regular 
        liability, if the total amount of the taxpayer's stranded 
        credits in 2007 is $100,000, the refundable credit is $100,000 
         20% = $20,000. In 2008, the total amount of stranded 
        credits is now $80,000; therefore, the refundable credit is 
        $80,000  20% = $16,000. In this example, the taxpayer 
        would still have more than $26,000 of stranded credits left 
        over in 2012.
    With respect to the issue of settling cases, although the Office of 
Tax Policy is not involved in the resolution of specific taxpayer 
cases, I can assure you that the IRS will ensure that section 53(e) is 
fairly applied as enacted.

            Question submitted by Mr. Johnson to Nina Olsen

Question: Unfortunately the Public Law 109-432 did not have any report 
        language associated with it. However, it is clear to me that 
        Congress was attempting to put this mess behind our 
        constituents who voluntarily came forward to report this tax 
        situation regarding AMT and Incentive Stock Options. Those 
        taxpayers who never reported these ISO transactions are likely 
        to have evaded this tax burden due to the fact that there was 
        no reporting to the IRS of these transactions. For taxpayers 
        who are known to the IRS, I would strongly encourage you to 
        settle out these cases in a fair manner and to stop accruing 
        additional interest and penalties.
Do you consider the taxpayers who have been caught in this nightmare of 
        paying income taxes on phantom gains they never received to be 
        in a more sympathetic position than those taxpayers who never 
        reported these transactions at all and have never paid a penny 
        toward similar tax bills?
Isn't it time to simply settle these cases?
    [Response pending.]

    [Submissions for the Record follow:]

         Statement of Grover Norquist, Americans for Tax Reform
    Chairman Neal, Ranking Member English and other Members of this 
subcommittee, I thank you for the opportunity to submit testimony on 
the Alternative Minimum Tax.
    My name is Grover Norquist, and I am president of Americans for Tax 
Reform. I submit my comments to you today with serious concerns about 
the effectiveness of the Alternative Minimum Tax and the possible 
remedies being proposed by Congress.
    More specifically, the AMT is worst case example of everything 
wrong with tax policy in this country. As we all know this tax was 
established to prevent certain Americans and corporations from using 
otherwise available deductions to reduce (and in some cases eliminate) 
their income tax liability. The individual AMT was thus intended to act 
as a failsafe mechanism to ensure that a small number of upper income 
individuals had to pay income tax.
    But as with just about every other tax, the AMT has gone way beyond 
hitting only a wealthy few and now we are faced with the possibility of 
30 million taxpayers facing this onerous burden. And as our members 
remind us every year around tax filing season, the burden is not just 
the additional taxes being paid but also the time to comply with the 
additional paperwork. The important point from the AMT lesson is that 
over time taxes do not hit just the wealthy as the middle-class always 
creep into these higher taxes.
    Just ask any household with a telephone which has been forced to 
pay an excise tax for over 100 years when Congress intended the tax to 
be a tax on the ``rich'' to pay for the Spanish-American War. The last 
time I checked America won that war but American taxpayers of all 
incomes continued to pay the tax. This is also the direction we are 
headed with the AMT and to a lesser extent the estate tax.
Identifying the Problem
    For policymakers to identify the correct remedy of the AMT 
explosion it is important to understand the true reason this occurred. 
As we show below, the surge is not the result of the 2001 and 2003 tax 
cuts but the AMT tax increases of 1990 and 1993 and the failure to 
index income exemptions to inflation. By our count, 97 percent of AMT 
payers expected to be paying the AMT in 2016, 30 of the 31 million 
taxpayers, are paying because of the higher rates enacted in 1993 and 
the failure to index to inflation at the same time.
    In talking about the Alternative Minimum Tax (AMT) a lot of blame 
has recently been targeted at the tax cuts enacted in 2001 and 2003. 
The idea behind this is that reducing taxpayers' regular income tax 
liability pushed their Alternative Minimum Tax liability higher, thus 
creating this rapid growth of AMT payers. As such, some Members of 
Congress are proposing to eliminate the tax cuts of 2001 and 2003 to 
fix the AMT problem.
    This is simply a race to the bottom whereby Congress is raising 
taxes on American middle class families to eliminate a different tax. A 
more common sense approach would be to just get rid of the AMT in the 
first place because the tax is not achieving its objectives.
    Moreover, the idea that the recent tax cuts have something to do 
with the recent surge is suspect. On October 29, 1999, the Senate 
hurriedly inserted a provision in an $8.5 billion tax package to allow 
families to use certain tax breaks so that they could avoid paying the 
dreaded--but surprisingly little-known at the time--AMT. Senate Finance 
Committee Chairman William Roth (R-DE) and ranking Member Sen. Daniel 
Patrick Moynihan (D-NY) issued a joint statement earlier in the week, 
declaring ``If we fail to extend the AMT relief, millions of middle-
income taxpayers will face an unintended and unexpected tax increase.'' 
\1\
---------------------------------------------------------------------------
    \1\ Godfrey, John. ``Senate votes to keep tax breaks.'' The 
Washington Times. October 30, 1999.
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    So this surge of AMT payers was already occurring before the 2001 
and 2003 tax cuts. In fact, the surge in the 1990's was dramatic. 
According to data compiled by the Tax Foundation and analyzed by 
Americans for Tax Reform, 117,500 taxpayers paid the AMT in 1989 with 
an average tax burden of $11,500 per taxpayer (in 2006 dollars). By the 
time the Sens. Roth and Moynihan issued their press release in 1999 
that number had increased more than ten-fold to over 1 million 
taxpayers. The average AMT liability was $7,700 (again in 2006 dollars) 
in 1999 which demonstrates the AMT was slowly creeping into the middle-
class. More people were paying but as the incomes of the taxpayers 
affected were smaller these taxpayers were also paying smaller amounts.
AMT Bracket Creep Was Already Occurring Before 2001 & 2003 Tax Cuts

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Sensing this growing problem both the House of Representatives and 
the Senate voted on August 5, 1999 to repeal the Alternative Minimum 
Tax as part of the Taxpayer Relief Act of 1999. At the time the 
``cost'' of repeal was just $105 billion. Most of the Members today 
complaining about the AMT problem voted against this legislation. 
Despite their opposition the legislation passed both Houses of Congress 
only to be vetoed by President Clinton with the common mantra that the 
legislation was a ``tax cut for the rich.'' We would not have this 
``problem'' today if that legislation was signed into law by President 
Clinton.
    So what caused this dramatic surge? In 1990 and again in 1993 
Congress raised the individual income tax. Knowing this would knock 
taxpayers off the higher revenue raising AMT and into the regular 
income tax, Congress also raised the Alternative Minimum Tax rates. 
This ensured all the people already paying the AMT stayed in the AMT 
system but also pushed more taxpayers into the AMT.
    Following the 1990 AMT tax increase the number of people paying the 
AMT nearly doubled from 132,000 to 244,000 taxpayers in just one year. 
In 1993 Congress created a two rate AMT tax system raising the rates 
from 24 to 26 percent for taxpayers with incomes under $175,000 and a 
28 percent tax rate for taxpayers with incomes over $175,000. Following 
the 1993 tax rate the number of taxpayers paying the AMT increased an 
astonishing 354 percent by the end of 2000.
    At the same time Congress failed to index the AMT income exemption 
for inflation so as taxpayers incomes increased over time more and more 
taxpayers were hit with the AMT. Even with an inflation index, incomes 
grow faster than inflation so this would not have solved all the 
problems but indexing for inflation would have at least mitigated some 
of the problem.
    For example, in 1986 the median family income was just $29,458 
while the AMT exemption was $40,000. The AMT exemption was lifted to 
$45,000 with the 1993 tax increase but by 1997 the median family income 
was exactly at the AMT income amount. Following 1997, the median income 
was higher than AMT rate which was a key component to driving the rapid 
increases in AMT payers.
Failure to Index AMT to Inflation Led To Rapid Rise in AMT Payers

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

97 Percent of AMT Payers Are Paying Because of the 1993 AMT Tax 
        Increase
    According to estimates by the Joint Committee on Taxation (JCT), in 
2016 the number of taxpayers paying the AMT will reach 30.8 million. 
Repealing the 1993 tax increase will remove 12.2 million taxpayers from 
the AMT rolls. As such 40 percent of all AMT payers are paying because 
of the higher AMT tax rates enacted in 1993. These higher AMT rates 
from 1993 will force American taxpayers to pay an additional $375 
billion of taxes from 2006-2016.
    The next step in our analysis was to determine the second part of 
the AMT problem--the fact that rates and income are not subject to 
inflation protections as is the regular income tax. If the AMT was 
indexed for inflation in 1993 most of the people paying would be off 
the rolls.
    Recent inflation protections enacted in 2001, 2003, 2004, and 2006 
has kept 17.6 million people from paying the AMT. This runs contrary to 
the opinion that the recent tax cuts have increased the number of 
people paying the AMT.
    So when adding the two numbers from the higher rates coupled with 
the inflation protections, 29.8 million of the 30.8 million that will 
be forced to pay the AMT are only paying because of the Clinton tax 
increase and the failure to index to inflation. That would leave only 1 
million people are actually paying because of high incomes and lots of 
deductions.
The Impact of the Tax Cuts on AMT
    Recently a number of policymakers have suggested that the tax cuts 
enacted since 2001 has increased the number of AMT payers. This could 
be the case but not for the reasons suggested. As I discussed above the 
AMT tax rates were increased correspondingly with increases in the 
income tax rates. Conversely, when income tax rates were cut in 2001, 
and again in 2003, AMT rates were not reduced correspondingly. This 
created an AMT tax liability higher than the regular income tax 
liability for some taxpayers. As such, the solution to this is not to 
raise the rates, either income or AMT, but to lower the AMT rates to 
match the lower income tax rates.
    A second reason for the rise in AMT is that the tax cuts created a 
number of new deductions for the regular income not available in the 
AMT. Most of these deductions enjoy bi-partisan support such as college 
tuition tax deduction. Therefore, to fix the AMT problem from the 
recent tax cuts is to get rid of the deductions that most members 
support.
    The combination of these two factors coupled with the policy 
failure of the 1993 tax increase is not the reason currently being 
given as the rise of the AMT. Accordingly, the proposed policy 
solutions such as increasing higher income tax bracket rates or AMT 
rates will do nothing to fix the problem. Furthermore, as we have 
witnessed in the past, lifting income exemption amounts only delays the 
problem. As incomes grow more and more people will be hit with the tax 
in the future. This is a situation of a dog chasing its own tail.
Recommendations

      AMT Repeal. We believe given these factors the 
Alternative Minimum Tax should be repealed with no offsets. It is 
unconscionable that Members of Congress who created this problem by 
raising tax rates and failing to index for inflation and then 
subsequently voting against repealing this tax six years later are now 
seeking to rearrange the chairs on the Titanic by forcing nearly 1 
trillion of tax increases to ``pay'' for AMT repeal/reform. Raising 
taxes on small businesses to pay for an income exemption that will only 
sock taxpayers at a later date is a ridiculous proposal. Taxpayers 
should not be paying this tax today and therefore should not be forced 
to pay higher taxes from one pocket to reduce their burden on the other 
pocket.
      Repeal The Clinton AMT Tax Increase. Absent repeal 
without offsets, Congress should repeal the 1993 AMT tax increase to 
bring the AMT tax rates in line with the regular income tax. We know 40 
percent of the AMT taxpayers are paying this tax solely because of the 
higher rates and these higher rates are generating nearly 50 percent of 
the revenue. This will not only remove 40 percent of the taxpayers from 
AMT it will also substantially reduce the amount of AMT taxes for 
existing taxpayers. Sen. Arlen Specter of Pennsylvania just last week 
introduced this legislation and I would urge a similar bill in the 
House and encourage all members to reverse this damaging tax increase.
      Do Not Raise Taxes Under The Guise of AMT Reform. Raising 
taxes to offset the ``cost'' will result in fewer jobs, a slower stock 
market, less growth, and ultimately a lower standard of living for all 
Americans. Any proposal to raise one set of taxes to offset the AMT is 
unnecessary and growth inhibiting. I urge all members to avoid this 
avenue.

    Thank you for the opportunity to submit my written testimony and I 
look forward to working with you on ending the Alternative Minimum Tax.

                                 

                  Statement of Betty & Carmelo Rivero
    We have, for some time now, been paying $1,750 per month to pay off 
our taxes for the year 2000. This is addition to the initial payments 
we made plus the bankruptcy filing we had to make in order to provide 
enough cash flow to make the $1,750 payments we are presently making.
    These issues began when I was working for i2 Technologies an up and 
coming supply chain management software company, as an Administrative 
Assistant. I was hired in 1995 at a starting salary of $27,000 per 
year. In 1998 i2 Technologies went public and I was given stock options 
along with other people in our company. This was the first time in our 
lives that either of us had ever been offered stock options and all we 
thought about was that this would give us the ability to do things for 
our daughters, Carmen and Amy and possibly buy a new home.
    In 1999 the stock started to rise pretty rapidly and in February 
2000 I started to exercise my options. Later that year we put a down 
payment on a new home in Carrollton. It was over 15 miles closer to 
both our jobs. We thought we were at the perfect point in our lives.
    At the end of 2000, i2 Technologies along with many other 
technology companies' stock started to drop drastically. Earlier that 
year I was told that I would be put on the black list, because of 
software on my computer that allowed me to support the company 
Controller, Nancy Brigham. Being put on the black list meant that I 
could not sell my stock during specific times of the year. Years later 
I was told that I was never added to this list but that I should not 
have sold my stock during that time because of the potential knowledge 
I had, given my position in the company.
    The black out period for that quarter began December 1st and it was 
lifted January 19th after we released our earnings for that quarter. 
Not selling my stock during this time caused me to acquire AMT taxes on 
stock I exercised early in 2001. But what I did not know at the time, 
was that the stock that was valued anywhere from $50 to $105 at the 
time I exercised it would only be worth $3 a share when I sold it. And 
I would be required to pay taxes not at the price it was sold for, but 
at the exercised amount.
    When I realized I owed these taxes I thought this was going to be 
an easy task to handle with the IRS. I could prove I never received the 
income at the exercise value for which the AMT taxes were being 
accessed. Well, we found that this tax, no matter how unfair, is 
legally owed to the IRS and they were not willing to consider 
dismissing it. They said that we needed to pay our taxes in full. Their 
job was to collect taxes not to consider whether the taxes were fair or 
not. Added to this when we were able to sell the stock at the $3 a 
share in 2001 we were unable to take a loss against the exercised AMT 
taxed value but were required to use as basis the amount paid which 
reduced our taxable loss greatly and was further limited by the 
allowable capital loss deduction of $3,000 per year. We are required to 
pay tax on income we never received on stock purchased in 2000 not sold 
until 2001 and the losses actually sustained for the same stock when 
sold was limited to $3,000 per year Capital Loss deduction (deduction 
against income not tax).
    As we have already stated, we have now settled with the IRS and are 
paying $1,750 per month. This payment will continue until we pay all of 
the taxes, penalties and interest that are owed. At the present time we 
have accrued about $40,000 in penalties and interest. We feel that this 
is the most bizarre portion of this affair: ``We are being penalized on 
taxes we owe for income we never received.''
    We are not saying we do not owe the IRS money because we do. 
However, we would have been able to settle with them years before we 
finally reached an agreement, if we did not have the AMT taxes to pay. 
We could understand owing taxes if we would have received the level of 
income for which the taxes are owed, but to be taxed for what we 
consider to be phantom income is difficult to understand, even though 
it is legal. We do not see an end to our paying the IRS. With the 
mounting penalties and interest it looks like we will be paying 
indefinitely.
    My husband and I are requesting your help, in any way possible, in 
eliminating alternative minimum tax (AMT).

            Respectfully,

                                               Betty Rivero
                                             Carmelo Rivero

                                 
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